Highlights From The Comments On Cost Disease

I got many good responses to my Considerations On Cost Disease post, both in the comments and elsewhere. A lot of people thought the explanation was obvious; unfortunately, they all disagreed on what the obvious explanation was. Below are some of the responses I found most interesting.

So, what is really happening? I think Scott nearly gets there. Things cost 10 times as much, 10 times more than they used to and 10 times more than in other countries. It’s not going to wages. It’s not going to profits. So where is it going?

The unavoidable answer: The number of people it takes to produce these goods is skyrocketing. Labor productivity — number of people per quality adjusted output — declined by a factor of 10 in these areas. It pretty much has to be that: if the money is not going to profits, to to each employee, it must be going to the number of employees.

How can that happen? Our machines are better than ever, as Scott points out. Well, we (and especially we economists) pay too much attention to snazzy gadgets. Productivity depends on organizations not just on gadgets. Southwest figured out how to turn an airplane around in 20 minutes, and it still takes United an hour.

Contrariwise, I think we know where the extra people are. The ratio of teachers to students hasn’t gone down a lot — but the ratio of administrators to students has shot up. Most large public school systems spend more than half their budget on administrators. Similarly, class sizes at most colleges and universities haven’t changed that much — but administrative staff have exploded. There are 2.5 people handling insurance claims for every doctor. Construction sites have always had a lot of people standing around for every one actually working the machine. But now for every person operating the machine there is an army of planners, regulators, lawyers, administrative staff, consultants and so on. (I welcome pointers to good graphs and numbers on this sort of thing.)

So, my bottom line: administrative bloat.

Well, how does bloat come about? Regulations and law are, as Scott mentions, part of the problem. These are all areas either run by the government or with large government involvement. But the real key is, I think lack of competition. These are above all areas with not much competition. In turn, however, they are not by a long shot “natural monopolies” or failure of some free market. The main effect of our regulatory and legal system is not so much to directly raise costs, as it is to lessen competition (that is often its purpose). The lack of competition leads to the cost disease.

Though textbooks teach that monopoly leads to profits, it doesn’t “The best of all monopoly profits is a quiet life” said Hicks. Everywhere we see businesses protected from competition, especially highly regulated businesses, we see the cost disease spreading. And it spreads largely by forcing companies to hire loads of useless people.

Yes, technical regress can happen. Productivity depends as much on the functioning of large organizations, and the overall legal and regulatory system in which they operate, as it does on gadgets. We can indeed “forget” how those work. Like our ancestors peer at the buildings, aqueducts, dams, roads, and bridges put up by our ancestors, whether Roman or American, and wonder just how they did it.

I think there is another dynamic that’s being ignored — and I would be surprised if an economist ignored it, but I’ll blame Scott’s eclectic ad-hoc education for why he doesn’t discuss the elephant in the room — Superior goods.

For those who don’t remember their Economics classes, imagine a guy who makes $40,000/year and eats chicken for dinner 3 nights a week. He gets a huge 50% raise, to $60,000/year, and suddenly has extra money to spend — his disposable income probably tripled or quadrupled. Before the hedonic treadmill kicks in, and he decides to waste all the money on higher rent and nicer cars, he changes his diet. But he won’t start eating chicken 10 times a week — he’ll start eating steak. When people get more money, they replace cheap “inferior” goods with expensive “superior” goods. And steak is a superior good.

But how many times a week will people eat steak? Two? Five? Americans as a whole got really rich in the 1940s and 1950s, and needed someplace to start spending their newfound wealth. What do people spend extra money on? Entertainment is now pretty cheap, and there are only so many nights a week you see a movie, and only so many $20/month MMORPGs you’re going to pay for. You aren’t going to pay 5 times as much for a slightly better video game or movie — and although you might pay double for 3D-Imax, there’s not much room for growth in that 5%.

The Atlantic had a piece on this several years ago, with the following chart:

Food, including rising steak consumption, decreased to a negligible part of people’s budgets, as housing started rising.In this chart, the reason healthcare hasn’t really shot up to the extent Scott discussed, as the article notes, is because most of the cost is via pre-tax employer spending. The other big change the article discusses is that after 1950 or so, everyone got cars, and commuted from their more expensive suburban houses — which is effectively an implicit increase in housing cost.

And at some point, bigger houses and nicer cars begin to saturate; a Tesla is nicer than my Hyundai, and I’d love one, but not enough to upgrade for 3x the cost. I know how much better a Tesla is — I’ve seen them.
Limitless Demand, Invisible Supply

There are only a few things that we have a limitless demand for, but very limited ability to judge the impact of our spending. What are they?

I think this is one big missing piece of the puzzle; in both healthcare and education, we want improvements, and they are worth a ton, but we can’t figure out how much the marginal spending improves things. So we pour money into these sectors.

Scott thinks this means that teachers’ and doctors’ wages should rise, but they don’t. I think it’s obvious why; they supply isn’t very limited. And the marginal impact of two teachers versus one, or a team of doctors versus one, isn’t huge. (Class size matters, but we have tons of teachers — with no shortage in sight, there is no price pressure.)

What sucks up the increased money? Dollars, both public and private, chasing hard to find benefits.

I’d spend money to improve my health, both mental and physical, but how? Extra medical diagnostics to catch problems, pricier but marginally more effective drugs, chiropractors, probably useless supplements — all are exploding in popularity. How much do they improve health? I don’t really know — not much, but I’d probably try something if it might be useful.

I’m spending a ton of money on preschool for my kids. Why? Because it helps, according to the studies. How much better is the $15,000/year daycare versus the $8,000 a year program a friend of mine runs in her house? Unclear, but I’m certainly not the only one spending big bucks. Why spend less, if education is the most superior good around?

How much better is Harvard than a subsidized in-state school, or four years of that school versus 2 years of cheap community college before transferring in? The studies seem to suggest that most of the benefit is really because the kids who get into the better schools. And Scott knows that this is happening.

We pour money into schools and medicine in order to improve things, but where does the money go? Into efforts to improve things, of course. But I’ve argued at length before that bureaucracy is bad at incentivizing things, especially when goals are unclear. So the money goes to sinkholes like more bureaucrats and clever manipulation of the metrics that are used to allocate the money.

As long as we’re incentivized to improve things that we’re unsure how to improve, the incentives to pour money into them unwisely will continue, and costs will rise. That’s not the entire answer, but it’s a central dynamic that leads to many of the things Scott is talking about — so hopefully that reduces Scott’s fears a bit.

A reader who wishes to remain anonymous emails me, saying:

In the business I know – hedge funds – I am aware of tiny operators running perfectly functional one-person shops on a shoestring, who take advantage of workarounds for legal and regulatory costs (like http://www.riainabox.com/). Then there are folks like me who are trying to “be legit” and hope to attract the big money from pensions and big banks. Those folks’ decisions are all made across major principal/agent divides where agents are incentivized not to take risks. So, they force hedge funds into an arms race of insanely paranoid “best practices” to compete for their money. So… my set up costs (which so far seem to have been too little rather than too much) were more than 10x what they could have been.

I guess this supports the “institutional risk tolerance” angle. There must be similar massive unseen frictions probably in many industries that go into “checking boxes”.

Relatedly, a pet theory of mine is that “organizational complexity” imposes enormous and not fully appreciated costs, which probably grow quadratically with organization size. I’d predict, without Googling, that the the US military, just as a function of being so large, has >75% of its personal doing effectively administrative/logistical things, and that you could probably find funny examples of organizational-overhead-proliferation like an HR department so big it needed its own (meta-)HR department.

That could be one force behind rising costs; it definitely seems important for K-12 education. But it doesn’t explain why the U.S. is so much worse than countries such as France, Germany or Japan. Those countries are about as productive as the U.S., so their cost disease should be comparable. Something else must be afoot.

Another usual suspect is government intervention. The government subsidizes college through cheap loans, purchases infrastructure, restricts housing supply, and intervenes heavily in the health-care market. It’s probably part of the problem in these areas, especially in urban housing markets.

But again, government intervention struggles to explain the difference between the U.S. and other rich nations. In most countries, health care is mainly paid for by the government — many countries have nationalized the industry outright. Yet their health outcomes are broadly similar to those in the U.S., or even a little bit better. Other countries have strong unions and high land acquisition costs — often stronger and higher than the U.S. — but their infrastructure is much cheaper. And there is no law or regulation propping up high wealth-management fees or real-estate commissions. In general, lower-cost places like Japan and Europe have more regulation and more interventionism than the U.S.

So if cost disease and government can at most be only part of the story, what’s going on? One possibility Alexander raises is that “markets might just not work.” In other words, there might be large market failures going on.

The health-care market naturally has a lot of adverse selection — people with poor health are more inclined to buy insurance. That means insurance companies, knowing its customers tend to be those with poorer health, charge higher prices. Also, hospitals could be local monopolies. And college education could be costly in part because of asymmetric information — if Americans tend to vary more than people in other countries with respect to work ethnic and natural ability, they might have to spend more on college to prove themselves. This is known as signaling.

When high costs are due to market failures, interventionist government can be the solution instead of the problem — provided the intervention is done right. So the more active governments of countries like Europe and Japan might be successfully holding down costs that would otherwise balloon to inefficient levels.

But there’s one more possibility — one that gets taught in few economics classes. There is almost certainly some level of pure trickery in the economy — people paying more than they should, because they don’t have the time or knowledge to look for better prices, or because they trust people they shouldn’t trust.

This is the thesis of the book “Phishing for Phools,” by Nobel-winning economists George Akerlof and Robert Shiller. The authors advance the disturbing thesis that sellers will continually look for ways to dupe customers into paying more than they should, and that these efforts will always be partially successful. In Akerlof and Shiller’s reckoning, markets don’t just sometimes fail — they are inherently subject to both deceit and mistakes.

That could explain a number of unsettling empirical results in the economics literature. For example, transparency reduces prices substantially in health-care equipment markets. More complex and opaque mortgage-backed securities failed at higher rates in the financial crisis. In these and other cases, buyers paid too much because they didn’t know what they were buying. Whether that’s due to trickery, or to the difficulty of gathering accurate information, it’s not good — in an efficient economy, everyone will know what they’re buying.

So it’s possible that many of those anomalously high U.S. costs are due to the natural informational problems of markets.

It’s pretty easy to tell a libertarian story where markets work fine, but government intrusions into these markets have rendered them so unfree that they no longer function the way they’re supposed to. And I think that is at least part of the story here. Yes, these things are often procured from private parties. But everywhere you look you see the government: blocking new entry (through accreditation standards, “certificate of need” laws, and zoning and building codes), while simultaneously subsidizing the purchases through artificially cheap loans and often, direct price subsidies. It would be sort of shocking if restricted supply combined with stimulated demand didn’t produce rapidly rising prices. Meanwhile, in areas that the government largely leaves alone (such as Lasik), we pretty much see what you’d expect: falling prices and improving consumer service.

But that’s perhaps a little simplistic. Agriculture is also the focus of a great deal of government intervention, as are sundry things such as air travel, and we don’t see the same phenomenon there. So we need to dig a little deeper and describe what’s special about these three sectors (we’ll leave public transportation out of it, because there, the answer is pretty much “union featherbedding combined with increasingly dysfunctional procurement and regulatory processes”).

First, and most obviously, they involve vital purchases made on long time horizons, and with considerable uncertainty. Food is more vital than health care to our well-being, but its price and quality are really easy to assess: if you buy a piece of fruit, you know pretty quickly whether you liked it or not. This is a robust market, and it’s going to take communist-level intervention to fundamentally mess it up so that food is both scarce and not very good.

Homes, schooling and health care, on the other hand, are more complicated products. You don’t know when you buy them how much value they will be to you, and it is often difficult for a lay person to assess the quality of the product. You can read hospital rankings and pay a home inspector, but these things only go so far.

The fact that these are expensive purchases that can go terribly wrong creates a great deal of pressure for the government to intervene. As ours has, over and over, in all sorts of ways.

And at the risk of giving up a little bit of my libertarian cred, I’ll say that government intervention in these markets did not have to be as expensive-making as it has turned out to be in America. Other countries have these sorts of problems too, but they’re nowhere near as large as ours.

Part of that is just that we’re richer than most of those other countries. We were going to spend the portion of our budgets no longer needed for food somewhere, and health care, education and housing are pretty good candidates. But that’s only part of the story. A big part of the story is that America just isn’t very good at regulation. When you talk to people who live elsewhere about what their government does, one thing that really strikes you about those conversations is how much more competent other rich industrial governments seem to be at regulating things and delivering services. Their bureaucracies are not perfect, but they are better than ours.

That’s not to say that America could have an awesome big government. Our regulatory state has been incompetent compared to others for decades, since long before the Reagan Revolution that Democrats like to blame. There are many, many factors in this, from our immigration history (vital to understanding how modern urban bureaucracies work in this country), to the fact that we have many competing centers of power instead of a single unified government providing over a single bureaucratic hierarchy. There is no way to fix this on a national level, and even at the level of local bureaucratic reform, it’s darned near impossible.

In other words, this is probably what we’re stuck with. It may not be Baumol’s cost disease — but it’s potentially even more serious, and it’s going to be a lingering condition.

I certainly don’t claim to have all the answers, but I do feel that much of the problem reflects the fact that governments often cover the cost of services in those three areas. This leads producers to spend more than the socially optimal amount on these products. I’m going to provide some examples, but before doing so recall that economic theory predicts that costs in those areas should be wildly excessive. If the government paid 90% of the cost of any car you bought, and that didn’t lead to lots more people buying Porsches and Ferraris, then we’d have a major puzzle on our hands.

Scott mentions that private for-profit hospitals are also quite expensive. But even there, costs are largely paid for by the government. Close to half of all health care spending is directly paid for by the government (Medicare, Medicaid, Veterans, government employees, etc.) and a large share of the rest is indirectly paid for by taxpayers because health insurance is not just income tax free, but also payroll tax free. I’d be stunned if health care spending had not soared in recent decades.

A sizable share of my health care spending has been unneeded, and I’m fairly healthy. I met one person in their 80s who had a normal cold and went to see the doctor. They said it was probably just a normal cold, but let’s put you in the hospital overnight and do some tests, just in case. There was nothing wrong, and the bill the next day was something in the $5000 to $10,000 range, I forget the exact amount. This must happen all the time. No way would they have opted for those services if Medicare weren’t picking up the tab.

Just to be clear, I don’t think any monocausal explanation is enough. Governments also pay for health care in other countries, and the costs are far lower. It’s likely the interaction of the US government picking up much of the tab, plus insurance regulations, plus American-style litigation, plus powerful provider lobbies that prevent European-style cost controls, etc., etc., lead to our unusually high cost structure. So don’t take this as a screed against “socialized medicine.” I’m making a narrower point, that a country where the government picks up most of the costs, and doesn’t have effective regulations to hold down spending, is likely to end up with very expensive medicine.

To be fair, there is evidence from veterinary medicine that demand for pet care has also soared, and that suggests people are becoming more risk averse, even for their pets. But there is also evidence cutting the other way. Plastic surgery has not seen costs skyrocket. (Both are medical fields where people tend to pay out of pocket.)

I started working at Bentley in 1982, teaching 4 courses a semester. When I retired in 2015, I was making 7 times as much in nominal terms (nearly 3 times as much in real terms), and I was teaching 2 courses per semester. Thus I was being paid 14 times more per class (nearly 6 times as much in real terms). No wonder higher education costs have soared! (Even salaries for new hires have risen sharply in real terms.) Interestingly, the size of the student body at Bentley didn’t change noticeably over that period (about 4000 undergrads.) But the physical size of the school rose dramatically, with many new buildings full of much fancier equipment. Right now they are building a new hockey arena. There are more non-teaching employees. You can debate whether living standards for Americans have risen over time, but there’s no doubt that living standards for Americans age 18-22 have risen over time—by a lot.

As far as elementary school, my daughter had 2, 3, and once even 4 teachers in her classroom, with about 18 students. We had one teacher for 30 students when I was young. (I’m told classes are even bigger in Japan, and they don’t have janitors in their schools. The students must mop the floors. I love Japan!)

There are also lots more rules and regulations. By the end of my career, I felt almost like I was spending as much time teaching 2 classes as I used to spend teaching 4. Many of these rules were well intentioned, but in the end I really don’t think they led to students learning any more than back in 1982. I wonder if Dodd/Frank is now making small town banking a frustrating profession in the way that earlier regs made medicine and teaching increasing frustrating professions.

People say this is a disease of the service sector. But I don’t see skyrocketing prices in restaurants, dry clearers, barbers and lots of other service industries where people pay out of pocket.

The same is true of construction. Scott estimates that NYC subways cost 20 times as much as in 1900, even adjusting for inflation. The real cost of other types of construction (such as new homes), has risen far less. Again, people pay for homes out of pocket, but government pays for subways. Do I even need to mention the cost of weapons system like the F-35?

To summarize, the case of pet medicine shows that costs can rise rapidly even when people pay out of pocket. But the biggest and most important examples of cost inflation are in precisely those industries where government picks up a major part of the tab–health, education, and government procurement of complex products. And excessive cost inflation is exactly what economic theory predicts will happen when governments heavily subsidize an activity, without adequate cost regulations. Just as excessive risk taking is exactly what economic theory predicts will happen if government insures bank deposits, without adequate risk regulations. Let’s not be surprised if the things that happen, are exactly what the textbooks predict would happen. Even FDR predicted that deposit insurance would lead to reckless behavior by banks, and he (reluctantly) signed the bill into law.

I’ve seen some evidence that corporations can be equally vulnerable to cost disease as public institutions.

For example, since the 1980s CEO pay has quintupled despite the lack of any growth in profits or otherwise to justify this. Now this is probably going to result in far smaller effects on overall cost, but it still stands as a demonstration of how market failure can occur and result in large cost increases in these firms.

I would venture that many firms have seen huge increases in both revenues and costs so that when you adjust profit for inflation it hasn’t really changed at all, on average.

What you observe is fifty years of optimization of wealth extraction. Price outcomes depend on the contributions of hundreds of participants. Every participant optimizes his/her earnings, exerting a constant upward pressure on price. Participants become ever more expert at getting rich. Wealth-extraction schemes (scams) are refined and optimized (in all markets), and price increases are pushed downstream (in markets where buyers can’t push back). Radical price increases reflect markets where consumers have reduced ability to push back:

Some systems are resistant to contributors’ efforts to extract wealth and some systems are not. There’s an equilibrium between cost and readiness to pay. To reduce the costs in expensive domains, willingness to pay the high costs has to be reduced. As long as the buyer won’t or can’t say no, costs will increase through the entire production process. There won’t necessarily be one big obvious rip-off, but every participant will optimize the heck out of his contribution and the overall pressure will push costs up.

Could one provide a cheaper alternative in these domains? Sure for a little while, but if the bottom line is that people are willing to pay more for the service the prices will creep back up.

The only exception would be where the new, lower-priced, alternative sets a new standard and buyers refuse to continue paying the old prices. See https://stratechery.com/2016/dollar-shave-club-and-the-disruption-of-everything/ for a great article about this.

Except, in the case of power plant costs, the causes – at least, for the increasing US costs – are quite a bit more apparent. Pre TMI, US costs were in line with the rest of the world’s cost. Post TMI, not so much. New regulatory burdens all by themselves increased the cost of new plants by a factor of ten. Now, this is of course not proof that any of the other problems that Scott mentioned are entirely – or even mostly – caused by increasing regulatory burdens. It does however, show that government institutions as awful as the NRC do exist, and that their effects can raise costs by the amounts seen health care, education, etc…”

[Fear of lawsuits] is well understood as the cause of the substantial rise in light airplane prices since 1970. A single-engine, four-seat Cessna 172 cost an inflation-adjusted $77,000 in 1970. A substantially identical airplane cost $163,000 in 1986. And went out of production the next year, because people weren’t willing to pay that price. When congress passed laws relaxing the manufacturer’s liability for older airplanes, Cessna was able to reinstate production in 1996 at an inflation-adjusted $190,000. Today, the price seems to literally be “if you have to ask, you can’t afford it”; the manufacturer only advertises fleet sales, but I’d estimate about $400,000 (of which ~$100K is fancy electronics that didn’t exist in 1986 and weren’t standard in 1996).

In this case it is particularly easy to pull out the lawsuit/liability effect because there aren’t many cofounders. The 1986 Cessna is so little changed from the 1970 model that they sell at about the same price on the used market when controlled for condition and total flight time. And fear of lawsuits didn’t manifest as safety enhancements of inscrutable cost and value, because light airplane crashes are almost always due to Stupid Pilot Tricks and almost everything that a manufacturer could do to mitigate that (e.g. tricycle landing gear) was standard in 1970. But the manufacturers still get sued, and have to pay millions, so there’s nothing to be done but pay for liability insurance. And, second-order effect, cut production when your customers start balking at the increased prices, so you have to amortize the fixed costs of actually building airplanes over a smaller sales volume.

So, a doubling in price over fifteen or so years, a quadrupling over fifty years in spite of Congress noticing the problem and trying to mitigate it, attributable to safety/liability concerns but not resulting in actual safety improvements. I have no trouble believing something similar is happening in other industries but is harder to discern because too many other things are happening at the same time.

Wikipedia suggests that almost all of those other countries have litigation rules that make weak civil cases more costly, which seems like evidence in favor of the litigation hypothesis. It also means that there’s a relatively straightforward solution.

Doug on Marginal Revolution, in response to a lot of people asking whether maybe we were just calculating the CPI wrong:

That’s a plausible hypothesis, but viewed through that frame of reference, median wages have also gone down tremendously. It’s still the case that the median person spends at least six times more of their paycheck on healthcare. If healthcare is a closer metric to “true prices” then manufactured good, then that means median wages have fallen by around 80%. It also means that overall GDP has crashed since 1970, since the price deflator now averages 6-7%, and nominal GDP has only averaged around 4%. It would mean that the economy has literally been in recession 90% of the past 40 years.

The only reason we’re not all starving in the street is from the miraculous gains in manufacturing productivity and automation. But again, in this framework, that process is largely exogenous to the terrible macroeconomic situation. If those gains slow down even a little, and the macro trends continue, we’re probably facing imminent economic collapse. So maybe this is a plausible hypothesis, but it certainly comes with a whole lot of extreme implications. I think medicine/education specific cost disease is a much more likely explanation.

One commonality in the examples cited is disintermediation/subsidies. College is paid for by a third party, and financed by generous government loans. Generous in the sense that they are easy to get, not easy to get out of. Health care has massive tax subsidies, and for a good period of time felt “free” to employees. Public schooling is paid for indirectly.

Regarding the section on risk aversion, I happen to be in the playground business. The most common injury is broken bones from a fall. Consequently, our industry has ended up with poured in place surfacing, which costs 10x as much as mulch or pea gravel. It is wonderful stuff, but really increases the cost of the playground. Again, no one pays directly for their playground, and the paying party cannot risk not being in tune with the regulations.

Markets cannot function if the risk reward relationship is not direct.

In all of these problem sectors it seems the resources consumed in each industry has shifted to servicing and extending the definition of the marginal ‘customer’. This can explain I think some of the above

E.g.. 40 years ago hospitals received 100 customers. Ranked, patients 1-20 died. And no one really tried to save them (some comfort but that was it). Today they are trying (are obliged) to try to save patients no 5-15 (the 85 year old with triple bypass, 20 week premie). The total no of staff needed for this task swamps increases in individual productivity. You just need more people, even if they each are more productive or trained than in the pasts. So salaries for each does not go up that much, there are just more of them, total cost go up, and outcomes over the patients treated are somewhat but not much better (some now make it but some fraction still die). Hence medical curve shows some improvement but not 1:1 with cost.

In education, in the 1950-1970s we could afford to socially promote non-academically inclined students, not really expend effort on them as long as they kept quiet in class, then have them leave at age 16 to go work at Ford. Universities could count on getting the higher performing students. Today, we have to deliver much weaker students all the way to the end of high school, also force many into college. And ALL the extra resources go to get this new lower end close to what used to be the minimal university student performance. The top cohort gets little extra resources and has not really improved. Hence, the scores across the new ‘extended’ student population stays flat.

I base this partly on what I have seen from my wife (engineering professor at top university), resources are heavily consumed by the lower performing students, top students have better opportunities than 20 years ago but in general the resources are much less focused on them than on the marginal students.

So if you assume these industries for whatever reason shifted focus to servicing deeper into the tail of the population aptitude/effort over the years (I am not saying this is good/bad, was for social reasons, for humanistic reasons or making any comment), this would very much explain the overall cost rise, coupled with the lack of desired improvement in statistics measured across the population that now gets services as a whole.

In short, in the US we define policies that drive costs based on the tail of the population, but we experience performance on the average. As an immigrant from a third world country I think this is a big difference often invisible to the US-born citizens I talk to. Maybe why this is a great country and I am here. All I can say is that it is a world view that is not common world wide. Where I grew up, No Child Left Behind law would have been designed as 1 Child Left Behind. There just were not the resources, but more important, it was just more socially acceptable to just halve the no of slots halfway through an academic program, for example.

So I guess the question is why are we so focused on pushing services into the tails and will we continue to do so? Does society really benefit from having a larger fraction of the population capable of doing crappy algebra? Clearly there will be some point where the cost becomes prohibitive and it will stop: maybe that is what we are seeing now. But it is stunning that this was a 50 year process — if the dynamics in social policy “markets” are that slow it is going to be really difficult to manage.

I can’t help but wonder if part of the ever-expanding expenses isn’t that we mediate our interactions through the legal system more than we used to.

What got me thinking about it was what I’m working on this week. To answer Incurian’s question above about why I was posting during the workday, I was avoiding working on a report for selecting a contractor for a project I’m working on. (I owe the taxpayer about three hours this weekend, since I spent time on Friday here and reading about the Oroville Dam spillway.)

We had contractors submit proposals, and we had two structural engineers and a construction quality assurance rep sit in a room for three days, writing our individual reports about each proposal, then coming to agreement about how we rate them. Then I have to write a report summarizing all of our individual reports, which gets fed into the arcane machine that will eventually spit out an award. This process costs about $10,000, and had zero value for evaluating the proposals. However, it has to be done this way or we’ll get dragged around in court by an offeror’s lawyer if they choose to make a case of their rejection. I think that in years past they’d use a simple low-bid process, which has its own problems, or the rejected contractors would bitch to their Congressmen or something but wouldn’t literally make a federal case of it.

I think you gave short shrift to libertarian explanations of this phenomena. In particular, the Kling Theory of Public Choice may explain a significant fraction of cost disease: public policy will always choose to subsidize demand and restrict supply. If you restrict supply holding everything else equal, prices will go up. If you subsidize demand holding everything else equal, prices will go up. If you do both, prices will really go up.

(1) Healthcare: The government restricts the supply of all healthcare professionals (for example, doctors, nurses, CNAs, pharmacists, dentists, LPNs, etc.) via occupational licensing. (I should note that maybe everyone can get behind the simple idea that the number of doctors per 10,000 people in the US should at least remain constant over time and not go down, as it has.) It restricts the supply of healthcare organizations (for example, hospitals, surgery centers, etc.) via onerous regulations, like the very ridiculous “certificate-of-need“. You have already explained in previous posts how things like the FDA restrict the supply of generic drugs. In terms of demand, the government subsidizes health insurance via the corporate income tax code, CHIP, the Obamacare marketplace, Medicaid, Medicare, etc.

(2) Education: I have done less investigation into this sector’s regulations. You mentioned Title IX. David Friedman has some nice blog posts on how the American Bar Association’s regulations on law schools make cheap law schools impossible. (This same concept also applies to healthcare-related professional schools, by the way.) If Bryan Caplan is right about signaling, a lot of education involves negative externalities, so it should be taxed or limited by the government. Instead, it subsidizes demand via loans. K-12 education, meanwhile, receives massive subsidies from the government; everyone can enjoy a totally free K-12 education.

(3) Real estate: Land-use regulations restrict the supply of housing. (Explanations of this can be found by googling “Matt Yglesias housing”.) It also subsidizes housing via Section 8, various other HUD programs, Freddie Mac, the mortgage-interest tax deduction, etc.

In short, any industry that the United States government has a heavy hand in has/will experience cost disease.

Scott, help me out here because I’ve read a long article about the mysterious nature of rising costs in certain sectors as well as hundreds of bemused comments, and the article had no more than a throwaway paragraph saying that maybe rising inequality is a sign that the ‘missing’ money is ending up in the pockets of the super-wealthy elite.

I come from a left-wing perspective, so I hope you can see that to me ex nihilo, “the super wealthy are becoming much richer than was historically the case, also all of these important services are becoming way more expensive than they used to be, but the one does not explain the other” looks like an extraordinary claim. I would like to see more evidence presented that this is not the case before updating in this direction!

In particular, I can see that a large majority of the odd features you have picked out about these services are acting exactly as predicted in Das Kapital volume 2, where Marx studies the process of realisation of invested capital (ie, money spent on labour, materials, tools etc) as the principal plus surplus value in money form. In particular, some of his predictions were:

1. Gains made by workers through collective action in sites of production can be taken away again by the landlord, the grocer, the financier etc.

2. The difficulty in the realisation of capital will incentivise businesses to strive for monopoly positions (whether by government mandate, mutual cooperations, quasi-monopolies such as real estate, branding and advertising).

3. The tensions between the production of surplus value and the realisation of surplus value will tend to set certain sectors of capital against one another – for example landlords would prefer if workers were well paid, but had to spend larger amounts of money on rent whereas factory owners would prefer to pay workers as little as possible, and that includes low housing costs.

Later analysis in the tradition of Marx have noticed that financial capital these days is doing very very well compared to workers, but also compared to traditional industrialists. And four out of the five of your examples are fields in which debt and financing plays a very large role. It’s pretty easy to see that financial capital would be incentivised to make these things more expensive so that they can extract more money through larger loans and financing. (I’m not certain about subways. Are they typically debt-financed?).

Financial capital certainly has the economic and political power to push for this, and they don’t particularly care if they squeeze other holders of capital along they way. They are debt-financed fields in which large monopoly powers exist for one reason or another. And while I acknowledge that bureacratic bloat is certainly playing its role, I’m baffled by the relative lack of consideration of normal capitalist tendencies on this thread. As far as I can see it is the single most important factor driving up the costs of these services. Please present me with evidence that I am wrong about this!

Some additional links less-directly related or less easy to excerpt:

National Center for Policy Analysis: Should All Medicine Work Like Cosmetic Surgery? Because plastic surgery isn’t a life-or-death need, it’s not covered by insurance. Costs in the sector have risen 30% since 1992, compared to 118% for other types of health care. Does this mean that being sheltered from the insurance system has sheltered it from cost disease?

The American Interest: Why Can’t We Have Nice Things? A breakdown of exactly why infrastructure and transportation projects cost so much more in the US than elsewhere, with an eye for Trump’s promise of $1 trillion extra infrastructure spending.

I think any explanation that starts with “well, we have so much money now that we have to spend it on something…” ignores that many people do not have so much money, and in fact are really poor, but they get the same education and health care as the rest of us. If the problem were just “rich people looking for places to throw their money away”, there would be other options for poor people who don’t want to do that, the same way rich people have fancy restaurants where they can throw their money away and poor people have McDonalds.

Any explanation of the form “evil capitalists are scamming the rest of us for profit” has to explain why the cost increases are in the industries least exposed to evil capitalists. K-12 education is entirely nonprofit. Colleges are a mix but generally not owned by a single rich guy who gets all the money. My hospital is owned by an order of nuns; studies show that government hospitals have higher costs than for-profit ones. Meanwhile, the industries with the actual evil capitalists – tech, retail, restaurants, natural resources – seem mostly immune to the cost disease. This is not promising. Also, this wouldn’t explain why so much of the money seems to be going to administrators/bells-and-whistles. If prices increase by $100,000, and the money goes to hiring two extra $50,000/year administrators, how does this help the capitalist profiting off it all?

Any explanation of the form “administrative bloat” or “inefficiency” has to explain why non-bloated alternatives don’t pop up or become popular. I’m sure the CEO of Ford would love to just stop doing his job and approve every single funding request that passes his desk and pay for it by jacking up the price of cars, but at some point if he did that too much we’d all just buy Toyotas instead. Although there are some barriers to competition in the hospital market, there are fewer such barriers in the college, private school, and ambulatory clinic market. Why hasn’t competition discouraged administrative bloat here the same way it does in other industries?

406 Responses to Highlights From The Comments On Cost Disease

I do tend to think that if we regard people’s comments in the linked sources as votes, and adjust for known info (E.g. CEO pay *is mostly* justified [Google CEO pay Adam Smith Institute for references], and as Scott Sumner points out (pace Noah Smith), the US does not have effective ways of controlling healthcare costs as a result of its hybrid system. Who pays doesn’t tell us enough about how a market works. Also we need to know in which ways they pay, and what the payees are allowed to do) the most plausible explanation is some combination of government mis/overregulation (Perverse incentives+decreased competition) plus some peculiarities of the markets involved (Which interact with the previous reason). I would say it is 70-20-10 government/markets/status goods, but I admit I haven’t done my own research on this, so this is more of a statement of priors modified by the opinions of the above respondents.

I am sorry if this comes across as snarky but it really has to be said. “CEO pay is mostly justified” is not “A known fact”. It is a deeply contested claim debated by mounds of papers and very skilled and learned academics. A passing reference to work by the Adam Smith institute is in no way sufficient to make it a given for purposes of discussion. On a personal level having done a fair bit of reading on the subject I am very confident that CEO salaries are inflated by various forms of institution all capture and cultural malaise, but I would never expect that this certainly be treated as a “known fact” for the purposes of discussion.

Does it really matter though? Even if executive compensation is totally bonkers, it’s such a small component of the overall costs as to be negligible. And it still doesn’t explain why costs are particularly out of control in e.g. health and education (not where the most bonkers executive pay happens).

Consider the Oracle corporation. Per their filings they paid their top executives a bit less than $200 million in fiscal 2016. But that was on $37 billion in revenue – so top executive pay is just a bit more than half a percent of that. Tiny.

Or in health care, it’s common to blame “greedy profit-obsessed insurance companies”. But say you cut out every dime of the profit – congratulations, you’ve cut total costs by maybe 5-10%. Not nothing, but hardly sufficient to explain the dectupled costs (and it’s not like insurance companies used to be non-profit). Something else is going on.

Is half a percent of revenue tiny? What percent of profits is it? What percent of their total wages across all tiers of employees? Why should it be considered as a percentage of revenue, other than that being the largest number you can name to compare it to?

Well, they currently have 136,236 employees, which means that they could take all of that executive pay and split it to provide their workers with an extra

1467.74986607

dollars each

keeping in mind of course that you still have to pay executives something and it’s usually higher than the average worker, you could probably shave that down to 1,000 extra

which is nice, don’t get me wrong. but is it a make-or-break figure? And keep in mind that these guys do seem to be overpaid moreso than other CEOs, which is probably why he brought them up as an example.

Couple other things to note – most of the compensation for Oracle executives (and this seems true at most companies) is in the form of equity rather than straight salary. I don’t know exactly what restrictions they may have on the equity they receive.

Another thought though – how much of increased CEO pay is due to increased maximum company size, due to globalization and mergers? WARNING: major simplification ahead. As noted, Oracle’s total employment is >100k. So break them up into 10 smaller companies, each with a CEO getting $4 million instead of $40 million, and suddenly CEO pay relative to the average worker looks more sane even though total executive compensation stays the same.

And I wonder how much of American income inequality is driven by the massive size of our largest companies – we’re home to a lot of global company CEOs making up our top 0.1%. Move them all to Denmark and suddenly their inequality shoots through the roof while ours drops, but the life of Joe Schmoe and Josef Schmosen doesn’t change noticeably.

Seriously, anyone complaining about CEO pay as a source of “rising costs” or “decreased employee pay” or “reduced shareholder return” has loudly announced that they don’t understand anything. It’s insignificant.

-When I pointed out the rise in executive pay, it was not trying to say a) that this was an important factor in cost disease for health care or education, etc. or b) that executive pay has been a major driver of costs in the private sector. It was merely an example to point out that the privates sector is also vulnerable to seemingly irrational rises in costs. The point to take is that despite increases in revenues and stock prices, the private sector does not seem to have been able to increase profit margins on average, suggesting that continually rising costs is not limited to the American public sector.

-That being said, I was not making a definitive claim as to the value of executives. The research that I saw suggested no link between pay increases and business outcomes, but I by no means have done a complete examination of the topic.

> Is half a percent of revenue tiny? What percent of profits is it? What percent of their total wages across all tiers of employees? Why should it be considered as a percentage of revenue, other than that being the largest number you can name to compare it to?

If your claim is that executive pay drives up costs, then yes, revenue is a good number to compare it to. The fact that exec pay/revenue is 0.5% or so implies that you could pay executives nothing, take all the savings and put it into price reduction, and still not reduce prices that much (assuming all your revenue comes from selling things).

Even if executive compensation is totally bonkers, it’s such a small component of the overall costs as to be negligible.

It is known that increased wages among lower-paid people have a trickle-up effect on the wages of higher-paid people in the same organization.

Among the managerial and executive ranks, does an increase in CEO pay have a trickle-down effect on the pay of their immediate underlings (trickle-down through the executive, and possibly managerial, ranks)?

So where is most of the money from profits actually going, if executive pay is not a large percentage? I’ve read a number of articles which seem to say that most of the profits are not actually being re-invested in things like expanding production or developing new products, see here and here and here and here.

I am aware that practice in the financial industry is to sum up the firm’s operating income for the year and then set the bonus pool as a portion of the tentative “profits.” Of course the bonuses paid out of the pool show up as a cost on the annual report and the tax return, when the actual profit/loss for the year is calculated.

(I believe this dates back to when all the Wall Street firms were organized as partnerships and the bonus really was each partner’s distribution of the year’s profits. Once ownership and management were no longer exactly the same people, the terminology wasn’t quite accurate anymore.)

Executive pay doesn’t come out of profits. It’s a cost, just like the pay of everyone else.

OK, fair point. I shouldn’t have said “profits”, but the basic intuition behind my question was that some expenditures are more forced on a company by the market (capital expenditures like manufacturing equipment, and salaries for lower-level jobs for which there less variation between companies) and some are more a matter of choice (like expenditures needed to expand production or develop new products), and executive pay is more on the latter side of the spectrum. And the latter part of the spectrum is probably what you want to pay more attention to in order to figure out where the money is going when companies are able to get increasing amounts of money from sales (whether due to being able to charge more for their goods/services without a significant decline in customers, or due to a growing number of customers) while the money they pay to employees isn’t increasing proportionally.

So, I’ll just rephrase my question in terms of what corporations are actually doing with the total money they make from sales–if there is plenty left over after you subtract costs such as executive pay, non-executive pay, capital expenditures needed to maintain existing production, and capital expenditures for expanding production, where is that money typically going for all the corporations that don’t pay dividends directly to shareholders? (which is apparently true for the majority of corporations on the stock exchange, only the biggest and most well-established pay dividends)

So, I’ll just rephrase my question in terms of what corporations are actually doing with the total money they make from sales

They put it in the bank, basically. There is a line item for cash. They can make small amounts of interest with near-cash equivalents. From there, investments may be made, or new departments created, or budgets increased, etc.

Your concern with executive pay with respect to profit seems odd because that’s a fight between the shareholders via the board and the C-suite. Generally the shareholders demand growth from the C-suite and are not looking to cut cut costs in that area, which as noted is a tiny slice of the revenue pie.

They’re weird. It’s the company intermediating between shareholders. I guess that it’s done for tax purposes, but I’d rather companies be incentivized to give dividends and periodically reverse split. Then individual shareholders could decide to buy or sell on the open market.

With buybacks, shareholders who choose not to sell to the company end up as larger stakeholders (after factoring out dilution through stock options). With dividends and reverse splits they will only end up as larger stakeholders if they actively choose to directly purchase more stock from other shareholders on the market.

Leaving aside the tax consequences, all buybacks do, compared to dividends, is change individual shareholders’ default behavior to effectively buying more shares of the same company, versus wherever they would have reinvested a cash dividend. Those who have a real problem with this can always counteract it by selling a few shares. It’s not unreasonable to wonder whether it makes sense to have a tax code that encourages buybacks– but as a shareholder, as long as the tax code is what it is I’d rather have companies taking advantage of it.

They put it in the bank, basically. There is a line item for cash. They can make small amounts of interest with near-cash equivalents. From there, investments may be made, or new departments created, or budgets increased, etc.

For a corporation that doesn’t pay stock dividends or use money for stock buybacks, does the annual amount they spend on things relevant to production–equipment, employee salaries, etc.–tend to approximately balance out with the annual amount they put in the bank, if you average over a long enough time? The links I posted in my first comment gave me the impression that the typical corporation was making significantly more money than they actually invest back in production, so I wonder if that means that over time a larger and larger proportion of a corporation’s net assets is just money in a bank that’s not doing anything for them aside from growing due to interest. But I suppose it’s possible that large spending comes in bursts so the amount spent vs. the amount put in a bank over the most recent year might look fairly different from a 10-year average.

Also, do you (or anyone else) have any suggestions about sources I might look at to find broad estimates of how the money from sales is allocated percentage-wise (including capital expenditures, employee salaries, money put in the bank, stock dividends, money spent on stock buybacks, and any other major categories) for an average corporation, or for particular categories of corporations?

1. Comparison of similarly sized firms remuneration packages between Europe and the U.S..
2. A general look at studies of institutional capture in the private sector.
3. Stuff on history of the firm in the 20th century, and overhaul s of firm function like the shareholder revolution.
4. In a more sociological vein, Miliband`s work on the power elite.

Related my but not quite on topic, I would suggest any full length treatment of this should include reference to relative income effects.

I am sorry if this comes across as snarky but it really has to be said. “CEO pay is mostly justified” is not “A known fact”.

It seems like it’s a known fact for anyone who thinks running a bigger company justifies a larger salary. After you adjust for changes in the size of firms, is there anything left to explain? Try this:

While I think that paper is a reasonable explanation of the phenomenon, it is very different from your description. It does not say that the size of the firm predicts the salary. It says that the existence of big firms increases the salary at small firms.

If we make enough assumptions about the the distribution of opinions of commenters and followers on blogs and imagine truth as evenly distributed somewhere within the range of opinions, then revising an opinion in accord with this voting method will decrease the expected difference between the opinion and the truth; this for the same reason that boarding the subway in the middle will minimize the expected distance to the exit once you deboard at the destination station: the voting method brings you closer to the middle and the middle is closer to the ends than any end is from another. Problem is, I doubt that the sorts of assumptions needed hold and that truth works that way.

this for the same reason that boarding the subway in the middle will minimize the expected distance to the exit once you deboard at the destination station

Um, do you experience distance dilation when you walk on subway platforms? Because if the cost of walking is just linear in the distance, the expected cost to get to one end (with 50% chance of it being either end) is the same no matter where along the train you are. This means you should just board at the closest door.

If you want to reduce the maximum distance to the unknown end, then yes, head for the middle of the train (or, technically, whichever part of the train will end up closest to the midpoint between ends at the destination station).

Of course, usually you have some time to kill before boarding a train, and would like to make efficient use of your time. So you get on the train at a point you know will be closest to your actual exit at your actual, known destination station.

(Not that I’ve spent countless idle commuting minutes thinking about this or anything.)

@Machina ex Deus
Where I live, exits can be anywhere along a subway platform. If you deboard a subway at an extreme end of the platform then the expected distance to the exit is 0.5 of the total length of the platform. If you deboard in the middle your expected distance to the exit is 0.25 of the total length of the platform–the exit is a random distance up to 0.5 a platform away from you in one or the other direction. This is a useful method for deciding where to wait for a train when you have time to walk along the platform before it arrives and want to save time (minimize expected time) walking along the platform after you deboard.

So to summarize: 90% of the economists in the known universe responded to your post… and not one of them even attempted to give FACTUAL answers to the questions you raised, questions which are fundamentally about ACCOUNTING, not vague societal forces?

School prices are up 2.5x over 40 years in real terms; that means they’re up like 10x in real terms.

Instead of 10000 words about long tails or whatever, can we get the LITERALLY 5 SENTENCE accounting answer of what drove that increase? Teachers per student is up X%; mean teacher compensation is up Y%; administrative staff per student is up Z%; mean staff compensation is up W%; auxiliary staff (gym, coaches, whatever) is up Q% … etc … real estate spending is up R%, of which S% is due to rising prices and T% is due to more space per student; legal compliance spending is up V%. And then some remarks about new classes of teachers, distribution of compensation, and geographic variability of these changes.

There MUST be a study on that, right?

Does that study not exist? If it doesn’t, how freaking incompetent is the economics profession? If it does, why have none of the 50 million people in this conversation summarized the major results?

I think this is a valuable meta-question. To start off with, we know that the people who responded in the comments and the linked articles are not “90% of the economists”. Most of them, it would be misleading to call them economists at all (or professional economists). But there do exist professional economists, and so three possibilities arise: 1) they have considered and responded to these issues, citing the relevant studies, in (presumably) more academic media; 2) they have failed to consider these issues because, to a professional economist, they are obviously not a Big Deal; 3) they have failed to consider these issues by some failure of insight or some other bad reason. Except in case three, the answer for you (based on my read of your having been unsatisfied with the resulting conversation) is to read more professional-economic sources than this blog, and so hopefully base your resulting views on something more detailed than the mostly unsourced musings of three hundred anonymous internet users.

I think that it’s a very helpful response. Most of us either do not want to or cannot become master economists, and it’s largely the same few people commenting every time. The solution in the community is to attract more economists, the solution for OP is to read more economic studies and stop yelling at us to become more interdisciplinary. And I will mention that OP wanted qualitative data, but Scott had already given that to us in his original article, and these are comments from a discussion of that data. We don’t have specifics, but what kind of industry is going to release a financial report organized like that, if it’s going to be damning? Who would finance the financial report?

I’ve noticed a general amount of tension that occurs in discussions between specialists and non-specialists. Generally speaking, specialists allude to large bodies of research and implicit understanding within their fields, while non-specialists ask for specific rebuttals and citations, and accuse the specialists of appeals to authority.

I think what’s going on is that there are two sorts of humility — there’s proper epistemic humility (you don’t know what you don’t know), and there’s improper social signaling humility (how dare you, lacking the proper academic credentials, question the priests and scribes?). And both sides are guilty at times of doing this the wrong way.

The fact is that there actually is a huge complex literature on almost any important issue, and there is a large body of implicit and widely understood knowledge among specialists, that is very difficult to communicate to non-specialists in the space of a blog post (let alone a blog comment).

But it is *also* true that there are a lot of BS status games in academia, and fields have blind spots, and sometimes a smart outsider can ask useful questions. And as a general principle, it’s right to not accept appeals to authority and to ask for specific arguments and citations.

But the key is that one should ask for these while showing proper epistemic humility, and that specialists trying to communicate the inferential distances need to be less condescending and more open to considering and responding to criticism by outsiders (and less insistent on being shown proper social deference).

There’s another kind of non-social, yet still interpersonal signalling: “Hey dummy! I’ve spent literally hours studying this topic (or this particular sub-idea within the field) that you obviously know nothing about. Go away and come back when you have a clue!)

Just saw this after I posted my comment. I would add that we need to look very finely at these categories. E.g. there is a big difference between Bertha the receptionist and Thomas who is head of… I dunno “Synergistic and integrative policy solutions” when it comes to admin in health and or education.

I’m not An Economist, but I pointed to detailed observations regarding the cost increases in health care, the topic I knew something about, on r/slatestarcodex of a nature I assume is not that dissimilar from the one you request. A primary driver of rising health care cost is medical technology. If you want a percentage, I can’t give you that, but there are lots of studies indicating that this variable has been a key variable for some decades. I refer to chapter 14 of the Oxford Handbook of Health Economics, from which I quote in that comment, which has a lot more on these and related topics (as do other chapters in the book, but that one is the main one on these topics).

Incidentally considering how complicated cost accounting and the problems pertaining to how to accurately account for cost in the medical sector is, I would strongly caution against simplistic, if accurately-sounding-, theories on these topics (in particular, but not exclusively). An exchange I had with Tibor a while back here springs to mind, in particular perhaps the notes I made towards the end of that exchange. I don’t think anybody should be expected to have the sort of knowledge you need to properly assess/evaluate cost developments in all the areas Scott talked about in his original post. I don’t have time to look at the links Scott provided, but assuming any of them is any good my advice would be look for expert opinion on particular topics (real estate, schooling, health care, etc.) and then proceed from there. If the person in question seems to proceed from an assumption that said individual is/can be an expert on all of them, he or she in my humble opinion most likely doesn’t have a clue how complicated the subject matters about which said individual talks really are (here I may, for all I know, be insulting some Big Name Economists to which Scott links in this post – as mentioned, I haven’t followed those links – but that doesn’t really change my view on the matter. Even an implicit assumption to the effect that a health economist can be An Expert on both institutional aspects of health care organization, the contribution from the regulatory structure and how this may vary across countries, cost accounting methodology, cancer cost development (…which cancer?), diabetes cost development (I know from my look at this research that diabetes is different from e.g. infectious disease, and so what works to cut cost (/or explain cost) in a diabetes context may not be what works to cut (/explain) cost (developments) in an infectious disease context), end-of-life health care cost developments over time, long-term care cost developments and how this varies with e.g. the prevalence of Alzheimer’s and Parkinson’s… is not reasonable, in my opinion).

Of course, you have to be careful with this sort of summarization because it can be true in different ways. An EpiPen is medical technology, and could serve as an instance of more money going into medical technology. But that doesn’t in an of itself explain why a basically unchanged product costs so much more now than it did. If suppliers of medical technology have more price control than suppliers of medical services, you would want to look further for reasons for that.

All I’m saying is that we shouldn’t look at the broad sectors and conclude “Oh, there’s more technology so that explains more spending.”

You also shouldn’t take a single product and point at it and say that because this product costs more now than it did in the past in real terms, that means …well, anything really. The pricing model of a specific medical product or service is highly unlikely to be at all informative about the contents of some sort of semi-sensible Model of The General Development of Medical Costs over Time.

“If suppliers of medical technology have more price control than suppliers of medical services, you would want to look further for reasons for that.”

Even a simple statement like this one, in combination with what came before it, contains/reveals multiple questionable implicit assumptions, which is something that often happens in these contexts as also illustrated by my exchange with Tibor. I’ll point out two.
a) A high price of a good/service does not imply that said good/service contribute significantly/positively to health care cost growth, or have done so in the past. A high unit price may in fact do the opposite, by virtue of a high price limiting adoption/utilization. It’s very common in the medical sector to see improvements in productivity as a result of a technological advance leading to lower unit prices combined with higher total outlays as a result of increased utilization – this phenomenon increases cost growth over time, not the opposite. Technologically driven health care cost growth doesn’t just derive from expensive cancer treatments and stuff like that, it also derives from various goods and services that have become cheaper over time and therefore accessible to a large number of people who did not in the past have the option of receiving the good or service in question. A high unit price leading to limitations in utilization can on the other hand be a factor limiting cost growth.*

…Of course in the context of this discussion you can then proceed to quibble about/have a discussion about whether there might be some cost associated with not treating people who might have been treated if the unit cost was lower, and if you do that you start entering the huge world of cost-effectiveness and cost-benefit studies, which may have addressed that question in the specific context you’re interested in.

b) The implicit costs = spending (/outlays) assumption in your comment is deeply problematic and I was thinking about going into that in my first comment. Outlays are usually what people worry about, but there’s a lot more to medical costs than just outlays, at least if you want to do any sort of thorough cost accounting. In the context of some of the diseases contributing significantly to medical outlays, a very substantial proportion of the total cost are non-monetary cost. I refer to my exchange with Tibor.

Yeah, I know it’s complicated. So do the people who contributed to the literature to which I allude. They figure technology is a big part of the story. They in my opinion, to the extent that I have one and am familiar with the research, have good reasons for claiming this. There are lots of other things of relevance if one is worried about medical care affordability long-term, and lots of things that are relevant because they affect cost levels (rather than cost growth rates) to a significant extent, but if you want any sort of big-picture explanation in the medical context then it really makes a lot of sense to include technology as a major component.

…

*I’m currently reading a text addressing among other questions the extent to which disease incidences are correlated over time; if you get cancer, are you more or less likely to get diabetes as well? Stuff like this. This kind of stuff is highly relevant for cost growth estimates and trajectories. People who don’t get a disease usually get another (/have a higher likelihood of getting a different disease), and that another one might be more expensive to treat. This sort of thing means that even if you were to completely remove a disease from the equation, with all the costs associated – let’s say you cured disease X tomorrow, and nobody ever gets it again – you could easily end up with an outcome where medical costs are actually now growing faster than they did before. To get a proper perspective of cost growth you need to evaluate the alternatives, and that’s sometimes quite difficult to do.

Of course, you have to be careful with this sort of summarization because it can be true in different ways.

So a particular finding could be explained in different ways.

An EpiPen is medical technology, and could serve as an instance of more money going into medical technology. But that doesn’t in an of itself explain why a basically unchanged product costs so much more now than it did.

Here is one scenario which is consistent with the particular finding but if things were a certain way would not make that first finding explanatory. So: an explication of the first point, which also makes no specific claim other than a particular unchanged technology has changed in price. That is: I make an empirical claim that epi-pens are largely unchanged but have gone up in price.

If suppliers of medical technology have more price control than suppliers of medical services, you would want to look further for reasons for that.

This is a conditional, and therefore does not claim that suppliers of medical technology have more price control than suppliers of medical services. It is a claim that if they did, that could be explained by multiple reasons. This is therefore a very, very bland statement. It carries none of the implications you discuss, and then go on to be a condescending tool about. Condescending and oblivious: pick one.

All I’m saying is that we shouldn’t look at the broad sectors and conclude “Oh, there’s more technology so that explains more spending.”

Here I sum up the point I was making. Note that the “All I’m saying” phrasing emphasizes the not-making-other-claims thrust of the contribution.

“I make an empirical claim that epi-pens are largely unchanged but have gone up in price.”

And I make the claim that this is completely irrelevant to the discussion at hand, which is about medical care cost growth in general. The price development of one good or service will tell you nothing relevant. Whether service providers have more or less market power than e.g. pharma companies is a different question, but again one that doesn’t really get us anywhere if the interest is in health care cost growth; a high level of market centralization is not why health care costs are growing as fast as they are (although “Clearly more work on the causal pathways underlying the relationship between costs and competition is needed” – Oxford Handbook … p.319).

In the specific context of this debate it made sense – to me – to assume you were trying in your comment to make claims or points which somehow related to the topic of discussion at hand, which is medical care cost growth. I don’t see how I could have known that you did not, and assuming the person with whom you are debating is trying to be on-topic seems a decent default position to me.

Shorter and slightly-more-to-the-point me: I think you were easier to misread than you imagined you would be. Someone who has spent time familiarizing him/herself with what this literature has to say about various things will in my opinion likely read your comment in a different way from the way you read it or would prefer it be read.

And as a final note, if all you were aiming to do was to get to that final observation of yours, you might be interested to know that that is not what the researchers who have worked on this stuff have done.

Epi-Pens are a great example, several competitors were hit by recalls or delayed FDA approval, and suddenly Epi-Pen found itself approaching a government granted Monopoly.
We don’t know why this happened although Epipen’s manufacturer was a very active lobbyist and Obama administration Donor. Which actually is a flaw in the essay, it assumes that Market participants have all kinds of motivations, but that government is motivated to do good. This might be a constraint in large obvious things like banning murder, but how many people vote based on the day to day actions of the FDA?
If it’s not many then a whole different set of corrupt incentives come into play. In that case I’d rather have a market, greed is at least honest (well greed is omnipresent, in a market I know how it’s being satisfied)

The annoying thing is that all of the economists aren’t doing anything more than restating their priors. Scott got a bunch of derp in response to his excellent post. Which is ironic, considering Noah Smith came up with the term.

As far as I know, only publicly-traded companies produce financial statements with anywhere near that level of detail in them. Government financial reports are summaries by function matching budget to expenditures, whereas nonprofits only have to produce a tax return and no other financial reports at all. These organizations do have to record their transactions, so the information exists somewhere, but it may not exist in any easy to collate form that economists can study. I used to be an Army Comptroller and I couldn’t even give you that information for the division I worked for. Nowhere in our appropriation did it say which type of staff we had to spend our personnel funds on, so that wasn’t recorded or reported.

You can get a fairly detailed picture for a public school district because so much is a public record under the relevant open records laws. For example, in my state you can go online and find out what any public employee earns in salary. State pension funds have to publish reports. The contracting process involves a lot of public disclosure. All of that is on top of the budget documents that are released directly.

You might not be able to just download a data series and go, but instead have to do a bunch of legwork and data entry, but heck we are talking about people with tenure and research assistants, right?

Oh, of course the records exist. And are there for public consumption (though not always for free). I was just saying reports that would give you the numbers you need don’t. The legwork and data entry have to be worth it. Economists are not accountants and don’t seem to have much of an incentive to do empirical research into budgeting and financial management. It’s not their area of expertise.

The cost accounting data is a particular problem in the healthcare industry. The following is my understanding from my wife, who has spent a pile of years doing this very thing for hospitals, with the title “Director of Budget and Reimbursement”.

The government is by far the largest payer, led by Medicare, but Medicaid also rides on the coattails of many of the reporting ideas. Together they make up such a huge proportion that they’re able to push much of their own administrative work onto the Providers (which is at least part of the reason they’re also able to claim they’re so administratively efficient: they’re just hiding it by making someone else do it). This primarily takes the form of the “Medicare Cost Report”.

The thing is, because hospitals are forced to do their accounting to align with Medicare’s view of things, it doesn’t make sense for each provider to come up with a separate cost accounting scheme that recognizes how costs are allocated in actual practice. And from conversation with my wife and her CFO, it seems that there really is a quite a difference between what cost accounting might suggest that you track, compared to what actually is tracked on account of Medicare’s demands.

The result of this is that hospitals have very little idea of how much a given treatment really costs. This in turn is one of the reasons for those articles you see occasionally about how charges for a given procedure can differ so wildly between two different providers.

The answer is because doing empirical work is hard, and it’s a lot easier to write a 500 word blog post in under an hour if you don’t have to look up data that either fits the argument you were already going to make or actually using the data to inform your beliefs.

The economists cited aren’t experts in the field they’re writing about, so they probably don’t have the relevant papers at hand to bring up even if they wanted to. They’re starting one step above layman’s level, and would have to find the relevant research (if it exists) and then read it. Not gonna happen.

There’s a whole field of ‘healthcare economics’, though I don’t have good links for that; I maintain that the reason we see insane cost escalations there is that the last time someone even mentioned something that could have saved money, we got the whole death panels debacle.

In those countries, agreements between public authorities and contractors are enforced by lawsuits, whereas in civil law jurisdictions such as France, Germany, and Japan, they are enforced by government regulations.

Whenever I start digging into anything, I end up with this being the root cause of any problem in America.

Americans like to laugh at the EU and its endless regulations on, say, banana curvature. True, it’s less expensive for American companies to comply with our much sparser regulations, but it’s much more expensive when somebody is harmed by an improperly curved banana and you have to spend millions on legal defense when they inevitably sue you on behalf of everyone who’s ever bought a banana that never had its curvature inspected. The law ends up in roughly the same place, as do best practices for compliance, but getting there is (I will posit) more fraught with expense and uncertainty in the American system.

Or the government could spend money to hire experts to consult with businesses and set sensible baselines for regulation[1], and then spend more to hire advisers to help businesses come into compliance with them.

Then courts would be left dealing only with cases of intentional cheating. And the costs would be born uniformly across the market, rather than falling mainly on companies attempting to innovate or expand.

> Or the government could spend money to hire experts
> to consult with businesses and set sensible baselines for regulation

Outside of a few cases, pretty much all regulation falls within *someone’s* idea of sensible.

Most “bad” regulation that I see is simply regulation based on a different utility function than mine. Large amounts of it protect people who are not like me at a cost higher than I would voluntarily pay for their protection.

Trying to balance all of these things is why we have government. The fact that we disagree with individual elements is not proof of ill-regulation.

After all, the fact that as we grow wealthier, we value security more (along with accepting its attendant costs) is no real surprise.

Actually to the bad regulation guy? Really? well in that case I assure you most bad business is just a different utility function. Government isn’t made of magical elves and when humans get involved all the same incentives are in play. When i see a bad regulation it’s almost always a lobbyist driven to gain an advantage, or a bureaucracy looking to expand it’s turf a thus improve it’s chances of internal funding and bigger teams/promotions for it’s people.
The only difference is that a business can go out of business if it gets too bad. I doubt a representative democracy will ever drop issues like going to war, taxes, or civil rights to focus on bureaucratic creep or specialized requirements in the construction of coal stacks (Requiring scrubbers was a fun bit of manipulation by Virginia to keep them cheaper than cleaner western coal that has to be mined more deeply, it would be cheaper and cleaner to have set emissions targets, by the way those car seats for 8 year olds, ever see any evidence they work? how about head start?)

I don’t doubt this is true in theory, or in fact that it has been true in the fairly recent past. On the other hand, the difference in the regulatory burden from 2001 when I first did business in the US to my most recent gig in 2015 was stark. I would contend that though you may not be there yet, you’re at least catching up fast. I don’t know how long this has been going on.

You guys may find that upon closer examination, you’re optimising for the worst of both systems. This is at least a plausible explanation for the cost disease.

It seems to me there are two questions here, the causal question and the accounting question. Everyone wants to answer the causal question but no one wants to give a fine grained and empirically backed answer to the accounting question. But really you have to answer the accounting question first, and you have to do it in a fine grained way that distinguishes between different kinds and levels of wage earners, profit makers and rent receivers.

> Relatedly, a pet theory of mine is that “organizational complexity” imposes enormous and not fully appreciated costs, which probably grow quadratically with organization size. I’d predict, without Googling, that the the US military, just as a function of being so large, has >75% of its personal doing effectively administrative/logistical things, and that you could probably find funny examples of organizational-overhead-proliferation like an HR department so big it needed its own (meta-)HR department.

I realize this was someone else you were quoting and not your own thought, but Army HR is actually pretty small. Our logistics organizations, on the other hand, are enormous and probably larger than our fighting force, but of course, conventional wars are won with logistics and we have the best logisticians in the world. We can move the right equipment to the right place at the right time anywhere on the planet, no matter how austere, like no other entity that has ever existed. In any context other than counterinsurgency, that is almost always more important than boots on the ground.

any explanation that starts with “well, we have so much money now that we have to spend it on something…” ignores that many people do not have so much money, and in fact are really poor, but they get the same education and health care as the rest of us.

First, even poor peoples food costs have gone down. Second, we are looking at aggregates here. America as a whole is richer, and is spending much more on certain things. That doesn’t mean everyone is rich. Third, yes, richer people pay for poor peoples education, health care and subways. We already knew that.

Put one way, the rich / higher earners can bear a certain tax level and the taxable base has also increased. Meanwhile, the cost to feed the poor has gone down, so we have much more to spend on education and such.

How much of the government spending in these sectors is coming from an expanding tax base versus deficit spending due to rising costs?
Or is a willingness to borrow to pay for these a reflection of increased aggregate wealth?

Was not expecting to see myself in that list. Especially since I forgot even making that comment.

In any case, to add a bit of evidence to my claim, I went and took a look at Proctor and Gamble. They seem a good fit, generally regarded as a well run company, not in an industry that has experienced any revolutions but still likely to have benefited from some automation and computing advances.

In 1997, which is the furthest back I can find easily, their revenues were just over $35 Billion. Their most recent financial statement had revenues of $65billion, though this is actually a slight fall, and in the past 5 years they have had an average of $70B, so it represents approximately a doubling in revenues for the firm. Despite the massive amount of extra sales, profit margins remain exactly the same, around 15%. Costs appear to have risen in lockstep with revenues. Its certainly not as extreme as the original examples where costs had grown completely out of control, but does serve as some evidence that the private sector have their own issues with keeping costs down.

Of course this is such a small sample we can’t draw too much from it. I lack the time or resources to do a larger investigation, unfortunately. I did quite easily find an opposite example, in BMW who have seen profit margins change from 1.5/2% in the late 1990s to 5-7% today. Though it also appears that cost disease might be a uniquely american issue so it might not be the best counter example.

Couldn’t this simply mean that Proctor & Gamble is simply growing? The forces causing cost increases in this case aren’t mysterious, they’re probably going directly to paying more employees and buying more facilities.

To put it another way, it would be relatively unusualy if revenues for a given company grew by 100% and it wasn’t because the company was investing a lot in growth.

Amazon is the famous example of the modern era — their revenues have grown astronomically but their profits are almost always zero because they plow all that revenue back into growing their infrastructure. This definitely isn’t “cost disease”.

Putting aside theories of the firm and agency problems and what not, I think its fair to say that firms will probably have more detailed objectives than just “growth”. No manager would focus entirely on revenue growth and just assume that costs will grow at the same rate. There will always be some attempt to maximise revenues and minimize costs, even if a CEO is prioritizing the former for some reason.

Speaking from a business standpoint, P&G are generally regarded as a very well run company, with quite progressive management. Yet in the past 20 years they have failed to make a single improvement to efficiency. There have been no organizational improvements, no savings in HR, no cultural advances. They have not benefited at all from advances in computer technology, or robotics, or from outsourcing, or other globalization related improvements.

P&G are not Amazon. Anyone can look at Amazon’s accounts and see what they are doing. P&G are not operating a long term investment strategy. Again, this is just one company and far too small a sample to be representative of all american business. But I do get the sense that this is a general issue faced by many industries.

Respectfully, that’s not a good example for what I believe you’re suggesting.

First off, inflation alone would bring the top line up to $53 bn regardless.

More importantly, P&G is in the competitive consumer products industry. Margins in such industries are typically pushed through competitive pressure to low levels, regardless of size. Walmart, for example, generates high dollar profits due to its size but operates at a razor-thin margin. It would be very unusual for a company like P&G to consistently generate high margins over a long period of time. Selling more stuff requires manufacturing more stuff and hiring more personnel for sales and such. The fact that costs “kept up” with the top line does not mean that P&G is experiencing cost bloat.

I think that if you wanted to make this point, you would have to show that P&G’s revenues and costs have gone up substantially out of proportion to the volume of products the company is selling. This doesn’t seem to be the case at all.

An example as you suggest, of a company where revenues and costs seem to spiral out of control, would be the best example but seems impossible to exist. Any company that experienced cost bloat similar to that of healthcare or education would surely go bankrupt, since with the exception of monopoly markets you would not be able to raise prices to stay afloat without reducing revenues. There might be companies which really did experience cost disease but it would be practically impossible to prove.

Whilst it is true as you suggest that any increase in goods sold will naturally also entail some increase in production costs and labour, etc. and one company will not maintain a consistent profit advantage over others in the long term, one must wonder why profit margins as a whole have remained almost exactly the same, across the industry. FMCG has not suffered any major industry shocks, while the last 20 years have produced plenty of external technological developments that should have reduced costs for everyone. The entire industry should have moved from 15% margins to something higher. There are 2 plausible explanations that don’t involve cost disease that I can see: 1, the benefits of P&G’s economies of scale, plus the external advances, exactly equal the growth in diseconomies of scale over the past 20 years. Or 2, savings from technology and other areas are much smaller than you might think and become unnoticeable in massive multinationals. Inflation, as you mentioned, does not cover all of the growth in revenues and costs so there must be some other factor at play.

Re: your first paragraph: then why did you use P&G as an example of a private corporation experiencing cost bloat? Did I misread you?

“one must wonder why profit margins as a whole have remained almost exactly the same, across the industry.” “The entire industry should have moved from 15% margins to something higher.”

This is really not a mystery at all. In competitive industries a low but positive margin is the equilibrium outcome. Industry-wide productivity improvements will simply result in a lower competitive price point as firms compete to maintain or gain market share. The most likely explanation for P&G’s growing top line is that they’re selling a higher volume of products rather than that the industry has lost its grip on cost control. Anecdotally, do you think of laundry detergent, for example, as a good whose cost to the consumer has spiraled out of control the way it has for education or healthcare?

< Any company that experienced cost bloat similar to that of healthcare or education would surely go bankrupt

Interesting theory.

To test it, you can look at companies actually in the education market, in the sense of literally directly selling education to parents at a publicly listed price paid each year. This exists in the UK as a substantial sector (it is much rarer in the US).

In the UK, state schools cost ~£4000 per child, non-boarding non-state schools ~£15,000. Such schools have in fact increased their fees by at least that much.

The only ones going bankrupt are those who fail to increase their costs sufficiently to support such prices; minor regional ones unable to find a niche between the best local state school and the cheapest more prestigious boarding school.

Meeting the requirements of rich people is expensive, i.e. involves a lot of money; see definition of 'rich'. To the extent that any sector focuses on the needs of wealthy and rich people, it will require spending a lot of money.

Especially if it attempts to provide a near-universal service at a standard acceptable to the rich.

In “theory”, a company like P&G will over the long term extract the amount of available profit from it’s market it can, compared to competitors and alternative uses for the money. Sounds like you’ve established that as around 15%.

If costs external to itself, for example wages, or a subset (like health care for employees), taxes, etc… increase, then it’s going to increase those same costs for everyone in the same industry in a somewhat similar fashion (I’m ignoring competitive advantages like automation, etc… Eventually competitors will either also adopt or else die). Thus even though P&G may not have it’s cost of manufacturing increase, a general increase in health care costs is going to increase it’s costs and also the costs of it’s competitors, leaving them all at about the same profit margin as each other, with the increase in costs mostly passed on to others in the form of price increases, or wherever the get their revenue.

This is different than internal company-specific cost increases, which would make the company less competitive with others and result in some sort of change, for example going out of business and having it’s assets sold for more productive uses.

I just got to experience this phenomenon, similar to Sumner’s cold patient. Our baby had a low fever and was acting and feeding normally, but because she is very young, we stayed at the hospital for three days while they absolutely positively ruled out meningitis. This despite the fact that we have an HMO that should want to cut costs. Such treatment may not be the best thing for a society with extra money but it may not be the worst either. Even if I’d had to pay a lot out of pocket, I might have, because you feel like you can’t take any risks with your baby’s life. And of course, we are going to pay twice as much for daycare as we could be, just in case the cheap place murders children or something.

Friends of ours were in a similar position with their newborn; hospital said some test (white blood cells maybe) came back low, so she had to stay in, despite no other symptoms of illness. She was there for some weeks, nothing was found, but I’m sure there were significant expenses, and they couldn’t really go against the doctors advice or they’d risk CPS.

> Any explanation of the form “administrative bloat” or “inefficiency” has to explain why non-bloated alternatives don’t pop up or become popular. I’m sure the CEO of Ford would love to just stop doing his job and approve every single funding request that passes his desk and pay for it by jacking up the price of cars, but at some point if he did that too much we’d all just buy Toyotas instead.

Because once a non-bloated alternative becomes popular, the company grows and becomes inefficient (there’s a whole area of corporate pathology to explain why). And the same applies to both Ford and Toyota, so they can’t really compete in this respect. Small companies, on the other hand, can’t compete because enomonics-of-scale make them less efficient. The only way for them to compete is to become big. Et c.

Any explanation of the form “evil capitalists are scamming the rest of us for profit” has to explain why the cost increases are going towards bells-and-whistles rather than to evil capitalists….How does an evil capitalist get more profit by raising prices and using the money to hire more administrators?

Scott – as both BenWave and I pointed out in the last post, you’ve got the directionality wrong here, probably because, as your Ford example shows, you’re thinking in terms of industrial capital (where the capitalist owns the means of production and is in opposition with labor) rather than financial capital (where the capitalist owns the _means_ of the means of production, as it were, and is in opposition to both industrial capital and labor).

As such, in this case, an evil capitalist doesn’t get more profit by raising prices and using the money to hire more administrators. That indeed doesn’t make any sense.

Rather, an evil capitalist gets more profit by providing the financial capital in a system that either requires (e.g. prudence demanding higher insurance costs at every level) or enables (e.g. debt financing of amenities to meet market demand) which entails higher costs (in the form of premiums and/or personnel) which raises prices.

As BenWave describes, this is how wealth extraction works in an economy, like ours, dominated by financial capital, as Marx predicted and others have subsequently elaborated.

Seriously, this theory applies to at least one case where there are no greedy capitalists involved (or at least, they can’t leverage their greed in any significant way) and yet the cost still goes up. If anything, given that the ultimate controllers of public schools are elected officials, and they would benefit electorally from lowering taxes if they could (allowing them to get re-elected and potentially reap more bribes), you’d think there would be a natural downwards effect as a function of ‘greedy capitalist’. This explanation gets very low Marx from me, do better next time.

I’m sorry but if you think that private interests aren’t extracting vast amounts of rents from public education that they weren’t previously then you’re simply incredibly ignorant about education today. Try doing 10 minutes of basic, Google-level research into the various new forms of rent extraction in public education before you weigh in.

I like Scott and think he’s bright but the absolutely dogged rejection of simple explanations based on simply observing the distribution of wealth and power in our system and asking about who profits is the biggest problem with this blog and its commenters. Indeed, the mental gymnastics performed by the entire “rationalist” community to avoid any kind of left-wing analysis is exactly the sort of blind spot that community always identifies as a failure to think clearly in other communities.

Unfortunately for you, though, private interests don’t control public education. So are you saying that the intervention of these private interests is the only thing driving up costs? And it’s driven costs up similarly to other fields where private interests totally control the market and corporations therein?

Sorry, but this argument just doesn’t hold up, and telling me to google it doesn’t cut it either. If you want to actually argue your point, maybe you should actually argue it.

As I understand the argument in US Education the private interests are providing the loans.

In US healthcare they’re providing the insurance.

In housing they’re providing the mortgages.

By increasing funds available for goods with limited supply the price goes up & the financier gets more rent. It also creates an incentive for the people making the loan to lobby for regulation that increases prices.

I don’t see how this could apply easily to infrastructure building although nothing says all cost rises need the same neat explanation.

The feds are the biggest player in the student loan market, directly providing, subsidizing, and guaranteeing the loans (has been this way now since early Obama).

Even before that, student loans would be a worthless product for banks without significant government involvement (given that most students have no income and no collateral). Protecting student debt from bankruptcy, setting terms, subsidies – all government interference in the private loan market.

So if that’s the rent seeking, the feds are at least as responsible for it as the private actors.

The book you are describing is Capital in the 21st Century. There’s a lot more to it than the r>g stuff. Most of the book is Piketty providing a bunch of empirical work as evidence for his arguments at the beginning.

Off the top of my head, he looks at the returns for the endowments of universities in the US. The larger endowments (e.g.) Harvard have better returns than the smaller ones. These are basically hedge funds that have to make this argument public, and so hedge funds and other investment organizations presumably benefit from a larger size as well. This is an unproved and somewhat controversial statement among economists.

Then the next chapter is about Sovereign Wealth Funds. Etc., etc. for 500 pages.

Wow, what a constructive, informative reply. You’re being an ass, but for anyone reading here’s a summary.

If you look at Table 12.2 on page 448 he has the average rate of return for several universities. The average of 850 schools has a return of 8.2% between 1980-2010. Harvard, Yale and Princeton have an average of 10.2%.

There is a subchapter titled “The Pure Return on University Endowments.” It’s pages 447-450.

On page 450 he writes, “How can these facts be explained? By economies of scale in portfolio management. Concretely, Harvard, currently spends $100 million a year to manage its endowment.”

There’s more to it of course, but since you, an apparent expert, had no idea what I’m talking about, you can go look in your copy and read the chapter for yourself.

They get a low prior from me because they seem to imply group selection operating strongly across large, abstract groups. Wouldn’t within-group competition matter more than between-group competition for such groups?

In other words, a “class” in the Marxist sense doesn’t strike me as a realistic unit for explaining human interactions.

Even more specifically, the repeated reference to what “capital” is doing, as if “capital” were an agent, is confusing, and what is actually meant by this is opaque to me.

My best translation into my own terminology would be that any given landlord finds themselves enmeshed in a certain set of incentives that drives their behavior in ways that makes “landlord capital” behave consistently like an agent when averaged across all landlords.

And obviously all landlords want to charge as much as they can charge for rent, so even though they are competing with each other, there is still upward pressure on prices.

(Of course that means there is also pressure for the landlords to compete on things other than price, such as making their amenities nicer and having good site maintenance and customer service, so the increased income from higher prices once again tends to be absorbed by higher costs. So “landlord capital” doesn’t look anything like “greedy capitalists” and looks more like “vast formless things”.)

> such as making their amenities nicer and having good site maintenance and customer service

And the thing about landlords compared to other capitalists is that, given the structure of the housing market, competing on such things is a relatively unsuccessful strategy. It might increases customer retention, but that does not translate proportionally to increased revenue. In the case of rent control, it might actually decrease it.

Once you start to think like a Marxist, i.e. focusing on the material, and accepting the principle that power can take the form of control of physical resources as easily as coercion, you can easily add in any true bits of modern economics he was unaware of.

Well yes, that is historically what has played out. Instead of uniting for common class benefit as Marx predicted, the working class has in practice been divided and selection has operated Within the class.

I don’t mean to suggest that Marx was right about everything (he clearly was not!), but there are things of value tto pull from his work. And this is one of them – the incentives for capital combined with the monopoly power exerted in the applied examples does seem explain the cost disease.

The question isn’t, why should we believe that labor would compete with each other rather than uniting, but rather why should we believe that capital would unite with each other rather than competing? And why, if such cooperation occurs, should we expect it to be along the lines of class, rather than along the lines of other things?

The short answer to “why should we expect capital would unite with each other rather than competing?” is that there has been a variety of evidence that the capitalists do. Adam Smith thought he saw the phenomenon (commenting on it didn’t start with Marx). In general, it’s easier to organize a conspiracy if you need fewer people, so it is to be expected that the upper class will do better at conspiring against the lower class than vice versa (since the lower class only have strength in numbers, so successful lower class conspiracies must be much larger). And it really does seem to me that the historical record is one of upper classes doing a lot of cooperating to maintain power in the hands of their own and keep the outsiders down, with the splitting due to internal power struggles providing opportunities to outsiders being a periodic interruption in the usual status quo rather than being a constant thing. Myself, I would say that one of the biggest mistakes in Marx was to underestimate how much more difficult it is to unite the lower classes than it is to unite the upper classes.

@Sniffnoy Ah I see! Thank you for the clarification. Okay, I don’t have an immediate answer for that. Let me ponder it for a moment…

Okay, I notice that I am surprised, that I see several people appearing to assume that there must be a secret cooperation of capital owners in order for them to influence this cost disease. I see no reason why an aggregate of financial capital owners, each influenced by their own incentives but without cooperation between them, would not result in higher prices in those markets where monopoly power is significant. Even when we talk of cases where different providers/capitalists Are competing on the price of the same service (say, a basic health plan), Each of those capitalists is also subject to an Individual incentive to upsell the customer to a more expensive service. Now, even if they have the cheapest ‘more coverage’ plan around (winning that competition), the effect is to push towards higher, rather than lower, aggregate costs in this market.

I would also like to propose that the existence of lobby groups is strong evidence of cooperation between different owners of capital to influence markets through the apparatus of government. Perhaps that could be a hint to one reason why the cost disease problem appears to be worse in the USA compared to other advanced economies? (I have the impression that lobbying is a bigger business in the USA than in the other countries, but I now realise I have no evidence of this. Is this true, somebody?)

So I guess in summary my answer is, I don’t believe that it is necessary to presume active cooperation between individual capitalists in order to believe that their incentives push these markets in aggregate towards higher expenditures and higher revenues. Independent of this, I also think that there is evidence to support existence of cooperation between capitalists in similar fields. As for Why they should cooperate, evidently they have decided that it is worth their while. Is this a reasonable explanation, what do you think? I admit I havn’t come up with some way of calculating the relative weight of the customer acquisition competition pushing down aggregate spending and the customer upselling incentive pushing up.

benwave: OK, but this is a different question now. I realize the original post is about this cost disease, but that’s not what’s being asked about here. What’s being asked about here is why we should or should not ignore leftist analysis due to foundational issues. 🙂

That is to say: From a more standard economic perspective, the answer is, yes, a conspiracy of capital against labor has a free-rider problem. Let’s suppose we take as a given that it happens anyway as a general rule. (If it doesn’t, that would seem to put leftist analysis in a worse position, but let’s suppose it does.) Then the response to that datum is “Huh, I’m not sure why that happens” — and, if we include normative responses too, then the liberal one is basically “What can we do to stop that?”.

From a leftist perspective the answer is… I’m not sure, but here’s what I can discern:

1. Sometimes it’s basically given as “Duh, it’s in the interest of capital to conspire against labor, of course they do!” — which ignores the whole problem: Why does this conspiracy exist when it’s in everyone’s individual interest to free-ride, and why this conspiracy in particular rather thanother ones? (Like, by crude logic, of course labor would conspire against capital; of course people whose names begin with “S” would conspire against people whose names don’t begin with “S”; etc.)

2. OK, so that’s not an explanation. Maybe we can just take it as a fact that this happens, and not worry about why? Well, sure, nothing wrong with that (assuming it’s true)! But if that’s what leftist analysis does then this is not some victory for it over alternatives which also acknowledge that but can’t explain it either.

3. OK — and here we’re no longer really talking leftism but rather my own dim guesses at it — maybe other conspiracies, while they may flit in and out of existence, don’t participate in the same economic feedback loops as class-based conspiracies, and thus aren’t amplified in the same way? Naïvely this has the problem that once again it fails to distinguish between capital conspiracies (which we are assuming happen) and labor conspiracies (which we are assuming don’t), but that seems rectifiable; after all, it’s not like I’ve specified what those feedback loops might be. Maybe there’s a good reason they amplify one and fail to amplify the other. No idea. But if that’s the hypothesis, I haven’t seen it explicitly stated or explained.

4. Leftists talk about ideology a lot, and analysis of ideology. Reading Scott’s post, it certainly seems like that could be part of the answer. But just saying “ideology” isn’t an explanation, just a hint in the possible direction of one. All the same questions apply to an ideology-based explanation as to any other — why do ideologies spring up to support certain conspiracies and not others? (As Scott asks at the end of the post.) More specifically, what is the process by which this occurs, what’s the chain of causation? If the leftists have an answer to these questions, I’ve never seen it stated. Just, “Ah, well, when you analyze ideology, you’ll understand.” Not exactly helpful!

Two additional comments:

1. Another thing I haven’t seen justified is (again, making the assumption above) the leftist normative response to this: That we should organize a conspiracy of labor against capital. (As opposed to the liberal free-marketeer response mentioned above, that we should smack down the conspiracies of capitalist against labor.) Above I just talked about the descriptive response, but the normative response needs justification as well. I mean, I see it said that oh, doing the latter is “impossible”, but that’s… not much of an argument. “Impossible” is kind of meaningless without further specification, after all — but OK, let’s say at least it’s difficult. Why is it more difficult than the leftist plan? After all, if historically neither has worked, but you say one is more workable than the other, there must be some theory-based reason for this claim; what is it? And what about the other effects? E.g., mightn’t this response create a “world of sludge” — wasteful, unresponsive, stagnant? Whereas the goal of the liberal plan is to, y’know, create a world of fluidity — efficient, fluid, and innovative. Where’s the analysis that the leftist plan is worth this potential downside, or won’t cause it, etc.? (Admittedly, part of this difference might stem from the fact that leftists seem to be using a pretty different value system from liberals…)

2. Back to descriptive talk — above I discussed the assumption that capital is conspiring against labor. But — ignoring the possibility that that assumption is actually totally wrong — what if that assumption appears to be correct but is subtly off? Scott talks about it (as do others) in terms of the rich against the poor, which is not quite the same. Indeed I notice that even when people talk about it in terms of “capital” vs. “labor” there seems to be this assumption that, say, CEOs are “capital” even though they’re paid a salary. There seems to be this fuzzing of what class someone counts as to suit the current rhetorical point being made, which obviously isn’t conducive to good thinking. (And what about, say, middle managers?) So the question becomes, when we get down into the details of the mechanism, is it actually a class conspiracy, or a wealth conspiracy, or a manager conspiracy, or what? It could matter!

These are the sort of foundational questions that exhortations to just use leftist analysis leave me asking whether the speaker has considered…

Ah, well now we venture into General Counterarguments, which I personally consider to be dangerous and not very productive territory. But, what I have been trying to express, which I think applies more broadly than this one example of cost disease (although I don’t dare to suggest that it is universally applicable!), is that I do not consider a conspiracy of capitalists necessary in order for the aggregate actions of that group to tend towards extraction of more value from workers. I’ve given an explanation of how this might work in the case of cost disease. Forget about conspiracies, they are a red herring (pun partially intended).

You ask for example why the capitalists should conspire against the labourers instead of the Sams against the Johns, but once you forget about the idea of a conspiracy this problem dissolves. Capitalists as a whole influence Workers as a whole because workers all have some variation on the same relationship with capitalists and vice versa. It is the relationships and the incentives which cause the dynamic, and where conspiracies arise, if they do, I view that more as response to the already existing relationship dynamic than as prime cause. Sams do not all have a particular relationship with a John.

Ah, well now we venture into General Counterarguments, which I personally consider to be dangerous and not very productive territory.

If the question is “Is it correct to ignore leftist explanations”, then “are the foundations rotten?” is a very relevant question. Am I misunderstanding?

But, what I have been trying to express, which I think applies more broadly than this one example of cost disease (although I don’t dare to suggest that it is universally applicable!), is that I do not consider a conspiracy of capitalists necessary in order for the aggregate actions of that group to tend towards extraction of more value from workers. I’ve given an explanation of how this might work in the case of cost disease. Forget about conspiracies, they are a red herring (pun partially intended).

You ask for example why the capitalists should conspire against the labourers instead of the Sams against the Johns, but once you forget about the idea of a conspiracy this problem dissolves. Capitalists as a whole influence Workers as a whole because workers all have some variation on the same relationship with capitalists and vice versa. It is the relationships and the incentives which cause the dynamic, and where conspiracies arise, if they do, I view that more as response to the already existing relationship dynamic than as prime cause. Sams do not all have a particular relationship with a John.

I think perhaps you’ve misunderstood. When I speak of “conspiracy” I don’t necessarily mean a literal conspiracy in the usual sense. I just mean coordination — escaping Nash equilbirium.

Basically, your argument above doesn’t make sense. OK, so there’s this approximate symmetry between capitalists, and between laborers, and no such approximate symmetry exists between Sams or between Johns. That part makes sense! So, thank you for introducing something to distinguish those cases.

But the rest seems to be based on a confusion. It’s true that if we assume such a symmetry the resulting equilibrium will have to be a state that respects this symmetry. But the nearby states will not! And whether a point is a [stable] equilibrium depends on what’s happening nearby, not just at the point itself.

That’s the thing — any capitalist, any laborer, is free at any time to break this symmetry; that’s part of why it’s only an approximate symmetry. Your possible states are not, in fact, constrained to the diagonal. Symmetry might force the end result to lie on the diagonal, but it’s not the case that you can just ignore off-diagonal states in your analysis.

This seems to be a fundamental leftist mistake, imagining that there is some central register of the relation between capitalists and laborers, and that if the relation between capitalist A and laborer B changes, then so must the relation between capitalist C and laborer D, in the same way. But there is no central register, there is no action-at-a-distance; these are different relations. They may certainly affect each other, but and may even effect each other in a way that keeps them in sync — but unless you have some particular reason to believe the latter they have to be distinguished.

This is why I always have to boggle at the claim “Ah, but leftism analyzes systems of incentives!” This is something that orthodox economics already does. Only it does it without all the conflations, and recognizes that systems of incentives push things to Nash equilibria of those systems. Obviously, that doesn’t always actually happen, but at least it knows that it doesn’t know how to explain that, instead of pretending to explain everything.

Whereas this looks to me like one of the following:
1. Claiming you’re analyzing systems of incentives… and then saying, no, actually, systems of incentives don’t in the generic case push things towards their Nash equilibria. (Which… huh?? OK, I certainly it’s true that empirically they don’t always, but then what do they do in the generic case? Does this “analysis” actually put any constraint at all on what they do, or is this just unfalsifiable?)
2. Claiming you’re analyzing systems of incentives, and then conflating multiple variables involved in the system. (Thereby e.g. turning a competitive market into a bilateral monopoly.)

Also, while your analysis does successfully distinguish the capital-labor case from the Sam-John case, it doesn’t distinguish it from its own mirror image; why would capital be able to coordinate, and not labor, rather than both being equally able to? Still no explanation has ben provided for this. Which if you don’t have one, fine, but it seems you keep claiming to…

I had a busy week 😛 And if I’m completely honest, it takes me several attempts to understand what you’re saying in your replies. And unfortunately, this time I don’t think I have succeeded! Clearly we’re coming at this from very different angles. I’m afraid I’m becoming lost in the more abstracted discussions, I guess that’s why I prefer to stay closer to the concrete example of the OP. Let me try to rephrase what you’ve said in my own words to check if I have it correct? I want to understand properly the topic of the discussion

I think from your responses, you agree that incentives acting on individual industrial capitalists push them to extract more value from both their workers and their customers over time. Simultaneously, workers themselves are incentivised to seek maximum compensation from their capitalists, and customers to seek minimum prices. You propose that the result of these opposing individual incentives should at any point be tending towards some quasi-stable Nash equilibrium. And now, considering this dynamic as a given backdrop, what you have been discussing in the previous posts is a level on top of that: coordinated action of some group to change this game – not secretive, as in a literal conspiracy, but also something more than individual-level responses to incentives. Do I have that right?

But if it’s all “private rent extraction” what’s the simple left-wing explanation for why cost disease (at least in terms of it’s impact on the consumer) is so much worse in public sector, heavily regulated schools than it is in more fully privatized industries? Unless you’re arguing that government interference increases private rent extraction, but then you’d start sounding dangerously like a libertarian.

Not sure this is what the above comments are arguing, but I have encountered the position that unchecked economic power inevitable creates political power. Even if pure capitalism isn’t so bad, the theory goes, you’ll never get pure capitalism; once you let corporations get big enough it’ll turn into crony capitalism.

Because a government with the power to destroy companies at a whim if they get too big is going to be pure as driven snow? Capitalism creates economic growth -> growth creates political power -> political power creates corruption. Clearly, starting with infinite power in the hands of the state is the solution!

It takes two to do the crony capitalism tango. And if the problem driving the rent seeking is “inevitably created political power”, then checking the scope of political power seems like a good place to start.

@gbdub
“Because a government with the power to destroy companies at a whim if they get too big is going to be pure as driven snow?”
More like, have separation of powers and some democratic accountability, yes
My default is libertarian leaning (though only dogmatically utilitarian), but this seems just weak.
Avoiding corruption being very hard is no excuse for not trying, and in the case of government there seems to be some mechanisms not present in private corporation.

I don’t know about the simple left-wing explanation, but My answer is that the public sector is one example of a market in which monopoly power is a significant influence. Any market with monopoly power is vulnerable to cost disease, be it from Government control or regulation, natural monopoly such as real estate, monopoly granted by IP laws, monopoly power by branding, or simply having sufficient market power to squeeze out competitors. Financial capital is incentivised to bring about cost disease in any market, but the above examples are markets in which it is feasible to do so. The same tactics will not work in the paperclip market.

Also I don’t know who to address this to but I want it in this comment thread: how does the doctrine of rent extraction not then apply to Europe??? Compared to us, they’re still pretty capitalist, if not quite as much as us.

Anyhow, maybe this is why it feels like left-wing explanations are getting shunned – too often, the concept itself may have merit, but it’s just kind of applied sloppily without regards to whether or not it fits because it’s so ideologically rooted. And that’s not necessarily unique to the left wing either, but I feel like the right’s losing has caused it to try and re-engage with reality. Trump and Congress may mark a turning point in this regard (strategically, they should, as I think Freddie himself has argued), though currently much of the left wing has decided to double down on reality-ignorance.

I’m sorry but if you think that private interests aren’t extracting vast amounts of rents from public education that they weren’t previously then you’re simply incredibly ignorant about education today. Try doing 10 minutes of basic, Google-level research into the various new forms of rent extraction in public education before you weigh in.

It may be “vast amounts” in total, but it isn’t vast amounts percentage wise. A large majority of spending in every school district is on personnel that work or worked for the district. Even if outside spending — — on books or consultants or computers or what have you — has gone from 1% to 10% it is still completely impossible for that to have been responsible for the giant cost increases. It has to somehow involve staff costs because that’s where the bulk of the money goes.

I believe his thesis is some of this is debt-financing of capital expenditures. Huge bond measures for school districts seem like a popular thing, since they spread the tax increase out years into the future for an immediate benefit. They also aren’t going to be captured looking at operating budgets because the capital budget is separately reported.

I don’t really buy any explanation of the form implying financial capitalists are some sort of cabal intentionally doing this to drive up prices so they can offer larger loans and make more on the interest, but it doesn’t have to be intentional. Certainly much of the ridiculous prices for things like tech stocks and tech labor is just the fact that so much capital exists and nobody really knows what to do with it.

It’s not even always actual capitalists, or at least not in the public sector. A lot of this is enormous pension funds that are restricted in what they’re even allowed to purchase and municipal debt is a pretty safe place to park hundreds of billions of dollars that would otherwise just be sitting around doing nothing.

I don’t know how this explains the rising of operating costs, though. Maybe brand new shiny gyms and parking lots make the school board think they need to spend top dollar on everything else, too. It’s not their money. The other thing is school districts tend to be financed by property tax. Property tax receipts go up when property values go up. Certainly capitalists and the government dumping trillions into the housing market is a part of what drove housing prices so high, and indirectly made more money available to schools.

Debt service is a line item on the budget. If that was the driver of the cost explosion it should be reflected there. In the linked budget it was $7.8MM out of $118MM.

The basic claim (i.e. this has nothing to do with labor costs) is like trying to tell a story about the growth of the federal budget that excludes social security, medicare, medicaid, interest, and defense spending. You’ve excluded so much of the current budget that what’s left can’t possibly explain the increase.

The problem as I personally see it is that is true of any single explanation. It seems very obvious to me that all of these explanations are true. Baumol cost disease drives up labor costs. Risk aversion, overregulation, and litigation drive up administrative bloat. Cheap capital drives up capital expenditures. Enormous back end safety nets leave people free to go into massive debt to spend money they don’t even have on positional goods when they’re young. This is worth it much more here than in any other country because of the incredible returns to prestige we reward people with compared to almost anywhere else.

Maybe not even returns. I’m personally guilty of buying way more house than I need or even want. Why? Because I know damn well I’m not going to stay in it, and when it comes time to move, whoever I sell it to is going to want more house than they need, so I have to buy that if I ever want to be able to sell it.

But as Scott said, every claim seems obvious to the person claiming it.

> Debt service is a line item on the budget. If that was the driver of the cost explosion it should be reflected there.

In cases where capitalism, due to competition, produces goods at ultra-low costs (the standard example is a pencil) profit is also a line item on the budget, and a small one.

How could such a small thing have so much influence on the cost?

Consider a massive truck making it’s way through a trackless wasteland. n the dashboard is a compass. If you choose, you can measure the force exerted by the earth’s magnetic field on the compass, compare it to the power of the engine, and so conclusively prove it cannot have any influence on the truck’s direction.

Presumably you’re referring to goods and services sold to public schools such as textbooks? I can believe that those cost have increased in real, per-student terms, but as AnonEEmous says, you don’t provide the support for that case.

I would like to roughly echo what Sarah, LCL, and moridinamael have said. Although this will be a bit of a rant.

My basic impression is that “left-wing analysis” has serious foundational problems and that its basic assumptions and concepts don’t necessarily make sense (such as by not corresponding to anything in reality or by conflating/bundling multiple distinct things or by just straight-up making assumptions with no apparent justification). LCL has already pointed out one example.

The arguments I’ve seen with leftists online have done basically nothing to alter this impression. I asee a lot of arguments that apparently make sense within their framework and no attempts to justify this framework, or any recognition that any justification is necessary, that anyone could possibly have any problem with it. And as best I can tell from what I’ve seen, leftist analysis seems to be based on associational reasoning rather than explicit chains of causation. Like… one has to distinguish between individual nodes in your causal diagram, vs. summaries of patterns within it, and I see these confused constantly. Perhaps that’s just the bad sort of leftist analysis, I dunno, but glimpses of leftist analysis that is free from such elementary mistakes, or that seems like it was written by someone who understands the futility of reasoning based on verbal categories (honestly I think Eliezer’s writing on the subject kind of understates the problem), are rare.

So yeah, low fricking prior on leftist analysis, because I can’t put much confidence in an analysis that appears to depend on concepts that don’t even appear to make sense.

(I mean, I get the impression that at a high level, if we took the leftist position and “steelmanned” it, it would look something like this:
Leftist: Here is a feedback loop!
Liberal: Ah, but what if we could break that feedback loop?
Leftist: You can’t.
But in reality the leftists are nowhere near that explicit. More like, they come up with a single word that refers to both the loop itself and every part of it, thereby failing to distinguish between the different parts, as well as failing to distinguish between the parts and the whole, so that “What if we could break that loop?” doesn’t even arise as a question.)

I’m reminded of what I wrote earlier about the “SJ 101 FAQs” that are so common — documents that one will invariably get pointed to when arguing with SJers, but which again just assume the foundation and do nothing to justify it, and thus are totally unhelpful if your objection is a foundational one. (If you ever find you are writing something like this… understand that it will not be helpful to anyone serious.)

I’m afraid to say that I agree with your impression of the group of people who use the word Marx a lot, there is unfortunately a whole lot of unhelpful noise out there for anyone interested in intellectual debate. (And as I pointed out above, there are indeed many aspects that Marx was flat our wrong about. Leftists do ourselves no favours by refusing to acknowledge this!)

I can recommend David Harvey for a good modern Marxist source. As with most leftists, he is noticeably short on solutions but his frameworks seem pretty good to me. And I can offer myself for a debate partner, if you like

I get the impression that Marx himself was mostly free of the problems Sniffnoy describes; he was clearly a bright guy, and he took the materialism thing seriously. But he wasn’t working with modern economics and he had a relatively narrow view of how industrial society could work, writing as he did early in its history, so there are some pretty basic things he gets wrong, starting with the labor theory of value.

I don’t think it’s really possible to patch Marxism-as-written with what we know now and keep it recognizable as Marxism. But it might be possible to throw out Marx’s conclusions, apply his style of analysis to modern economics and history, and come up with something interesting; I’ve just never seen it. (The usual approach I see in the wild keeps those conclusions intact and papers over the more obvious problems with ugly hacks like “late capitalism”.)

Also: What is meant by the “distribution of power in our system”? You say it’s something one can simply “observe”, but it seems to me that different people have come up with plenty of different answers to that question, so that would appear not to be the case. Did you have in mind some particular technical meaning of “power” that would disambiguate? Otherwise this looks like another example of trying to use concepts with no attempt to make sure they’re well-founded.

The best kinds of Marxist analysis don’t really posit the existence of an evil capitalist character on which the world’s ills are to blame. Rather, they examine the incentives that influence any capital. Just because the capital involved in providing education is owned by the state does not make it magically immune to the incentives on capital!

In the case of public schools (secondary level education), I admit that this argument is weakest of all the examples. However, I don’t think I believe that cutting money to schools is as successful an electoral strategy as you think.

I think part of the disconnect here is that manipulation by financial interests is a candidate for ultimate cause, but you’re missing a proximate cause.

Is the theory that financial interests lobby for regulations that increase costs, or manipulate public consciousness so people spend more, or something? It’s that intermediate step you have to elaborate on to convince a capitalist like me.

I think your estimate of the amount of coordination among and economic control by the financial sector is way too high. How could bankers of decades past expect that encouraging lawsuits would lead to 10x higher health care prices, when no one today can agree on what the cost increase was caused by? There’s just too many ways this plan could be derailed. Why would they do something that primarily benefits future bankers, and is subject to incentive issues (1 individual banker or firm can’t do much on its own)? Even if the above questions were answered, how could they actually do it? Is there any evidence that banks supported any of the other trends mentioned in this thread which likely contributed to cost disease?

You can’t treat “capitalists” or “bankers” some some monolithic entity that is capable of making decisions all as one.

And as for Marx “predicting” it, if we were instead talking about deregulated issues with low costs, Marx’s prediction record is garbage.

I’m confused – why would you think you need long term investment to create additional public costs which benefit the investors? Each step along the way can be beneficial, so the financiers would have encouraged it.

One thing I forgot to say in the last comments – by %, the biggest increases in college tuition were in the 1980s, so many of the explanations that you hear that are very specific to contemporary times don’t really work.

I think any explanation that starts with “well, we have so much money now that we have to spend it on something…” ignores that many people do not have so much money, and in fact are really poor, but they get the same education and health care as the rest of us.

In your “Three Articles on Poverty” series, you seem to negate this objection. The series asks why, although their real wages have risen dramatically, the poor working class have no more financial security than a century ago. One of the answers it offered was that the middle class, with nothing but the best of intentions, has banned the poor-quality goods the lower classes once subsisted on. A poor family’s wages may have increased tenfold, but they have no more money to set aside for a rainy day, because they’re legally required to shell out for middle-class goods. Unlicensed dentistry, apartments without plumbing, primary schools without Epi-Pens. No-one for whom every dollar counts would freely choose to spend those dollars on premium dentistry. But budget dentistry is illegal. This is a counterargument to:

If the problem were just “rich people looking for places to throw their money away”, there would be other options for poor people who don’t want to do that

A second, unrelated point I wanted to make, is that many of the postulated effects overlap, where they compound with one another. Would lawsuit-avoidance inflate prices to the same degree if licensure rules weren’t artificially inflating the price of lawyers?

lets ask, “does cost disease happen to software”. Not in the writing of software but in software itself.

I look at task manager right now I can see that the browser I’m using is using close to a gig of memory.
When i was a kid I remember playing full 3D games on a machine with about 1/300th the memory. Those machines also had a set of browsers and they typically did not eat all RAM on the system.

The web browsers aren’t 300 times better. They’re almost certainly not 300 times as secure.
They have more features but not 300 times as many.

But of course RAM is cheap now so perhaps they’re just sacrificing masses of RAM to slightly improve user experience because it’s a safe bet there will be plenty of RAM.

Why haven’t efficient browsers taken over? there are some lightweight browsers and people complain about their browsers running slow or using lots of RAM but they don’t switch to Lynx much.

And it also seems to extend to things which are very expensive. One place I worked had a bank of servers that were almost entirely dedicated to running microsoft exchange which at it’s heart is mostly a mail client for low digit thousand employees.

Qmail exists and can handle orders of magnitude more traffic on the same hardware but hasn’t swept the market.

For most users most of the time the bloat seems to be acceptable because they can afford it and they seem to drag along most of the rest.

Can some of the design principles that help keep old software from getting too bloated be applied to organizations?

My favorite example of software bloat is the Clock app on my Android phone. It’s currently using 8.12 MB of RAM. If you wrote a program with the exact same practical functionality on the Commodore 64, it would be a sign you’re a seriously sloppy programmer if it used more than 1K of RAM. (If you don’t believe this, consider that the app is using 126 times the total amount of memory available on the C64.)

(Disclaimer: obviously C64 couldn’t play back MP3 alarm sounds, but those should be simple system calls for the Clock app, no?)

Actually, the foreign-language stuff is probably being counted in naive memory-usage metrics but probably not consuming actual RAM. Translations would be in a filesystem-backed memory map, and kept paged out unless accessed.

(Not because text translations use enough memory to care about, but because this falls out for free from a mechanism that covers many things)

Is there any reason to believe much different happens on an organizational scale?

Someone at the top wants to cut down costs just like some of the people at the top of the Mozilla foundation probably do want to cut down on wasted memory but there’s thousands of little things that could be better and they all take time and work to address.

A 5 minutes of an admins time for something that could be done better is no big deal… spread over 400 decisions and suddenly you’ve wasted a person-week.

There’s no point in having RAM in your computer if you’re not going to use it for something. it would be easy to make a web browser that used very little RAM but browsers can navigate between pages faster if they keep assets from recent pages around. And if it wasn’t then the operating would be using that RAM to cache files. Because most people have lots of RAM these days designers are actively looking for ways to use it to cache things and speed applications up.

It takes time and effort for a programmer to carefully manage memory. When memory is sharply constrained, it is worth taking the time to be parsimonious. When you have a lot of memory available, then it is more important to maximize programmer productivity.

Garbage collection, for example, needs you to allocate about twice your working set to avoid spending all of your time doing collections. Using a garbage-collected language is still the correct answer for many areas, because it allows your programmers to concentrate on other aspects of the code.

Memory usage in web browsers is mainly determined by the web pages, not by the browsers themselves. Web pages contain Javascript programs, and if a web page that you visit contains a program that uses a lot of memory, there’s only a limited amount the browser can do about it. In practice, most of the increase in memory usage comes from web pages having more on them, especially more graphics and more ads. There’s also more caching, which is making a sensible tradeoff spending RAM to reduce network bandwidth.

(Also note that if you try to observe a browser’s memory usage naively, through your operating system’s task manager, you will see a number that is dominated by double-counting because of how tab processes share memory.)

The productivity boom in memory means we don’t have to worry about using it efficiently. The same would go for healthcare or housing (or anything else) if we had a productivity revolution. If we built 10 million new apartments in NYC at low cost, i’d occupy more square feet than i really need I’m guessing.

Although the cause of 300x memory usage isn’t just features, I wouldn’t be surprised if a web browser does have 300x the features from a 90’s 3d game. Looking at lines of code as a proxy, Chromium weighs in at 15 MLOC, which is in fact 300x the size of the original Doom. This is not that surprising when you look at how many components are in Chrome: 3d graphics API (webGL), javascript JIT compiler, malware protection, video and audio media player, Flash player, PDF viewer, spell checker, language/locale support, Native Client (NaCL), integration with other Google stuff, Web Speech API, app support, etc. Oh and a web page renderer too 🙂

An angle I’ve not seen discussed is: why the lower cost should be the most appropriate? As other have noticed, there’s a more pressing accounting question, but all other answers are based on the assumption that the lower is cost was the truest/most desirable one. But what if the present cost has incorporated externalities that were discounted back then? What if the present cost, whatever it is, is the most reasonable because it includes the cost of a bunch of side-effects that in the past were simply dumped in the system?

Big construction projects had a lot of externalities that weren’t considered in the budget.

Consider, for instance, worker safety. For example at Hoover Dam in the early 1930s, workers were often killed by falling rocks. So workers started making their own hard hats. Eventually the construction company required them. At the next giga-project, the Golden Gate Bridge, the company issued hard hats and even strung safety nets under the bridge, which saved 19 lives (the last surviving member of the famous “Halfway to Hell Club” died in 2000 at age 95).

Similarly, a lot of constructions costs were kicked into the future. For example, the Oroville Dam really should have been built a half century ago with a second spillway. If they are lucky, they can build one in the near future, but if they’re not lucky there could be a few billion dollars worth of damage downstream from the dam.

Another example is the Lake Hollywood Reservoir under the famous “Hollywood” sign in Griffith Park. This huge dam was built in only 18 months in the early 1920s. But then William Mulholland’s next dam, the St. Francis, failed in 1928 killing about 600 people. So then from 1932-34, they had to laboriously retrofit a colossal pile of dirt in front of the Hollywood dam to make it safer.

My impression is that blue collar workers are much more concerned about safety today than in the past.

Part of it is that as people have gotten richer, their risk-reward tradeoffs evolve toward demanding higher rewards for taking on more risk. (And by richer I don’t just mean current income, but possessions. People have a lot more stuff than they had, say, 50 years ago because even if income hasn’t gone up that much, we’ve accumulated more stuff).

Another part of it is that knowledge of how to mitigate risks has gone up, which raises budgetary costs.

For example, when construction began at Boulder Dam around 1930, nobody thought to issue hard hats to workers to keep them from being killed by falling rocks. Hard hats barely been invented back then. But some workers had the idea and started making their own and the idea of hard hats spread, first around the work force, then nationwide due to the huge publicity about the project. Eventually “hard hat” became synonymous with “construction worker,” but the connection is less than 100 years old.

Today it seems obvious that construction companies should issue hard hats to everybody on the job site, and thus the price of hard hats gets penciled into the budget. But that wasn’t obvious in 1928.

If workers put a higher cost on risk than they used to, that increases the cost of hiring people for risky jobs. It doesn’t mean that risk used to be an externality.

If companies now realize that hard hats reduce risk costs by more than the cost of the hard hats, that’s an improvement in production technology. It doesn’t mean that the risk used to be an externality.

What if, say, old-time workers tended to underestimate the risks and underestimate the costs of getting knocked on the head by falling objects?

A lot of risks are much better understood today due to quantitative analyses done by insurance companies, often after being prodded by plaintiffs’ attorneys.

My general impression is that a common pattern across the 20th Century was for many injuries to be more or less compensated until plaintiff lawyers succeeded in convincing a jury that a deep-pocketed employer and/or insurance company should pay up. After that becomes a precedent, insurance companies raise rates substantially and strongly suggest to their clients a long list of safety measures. Over time, all these new safety requirements get incorporated into the cost base.

@David Friedman:
I understand your point, but it seems to not grapple with the strongest argument.

The cost of worker injuries was not borne by the company, nor was it borne entirely by the worker.

Absent a robust system of health insurance, life insurance, and disability insurance, whose price is paid for via compensation, the loss of a worker to injury will be reflected in society as a whole.

You might bring up the choice of the worker here, but one should consider the widow and the children of the worker, and the future charity supporters of the now blinded or lamed worker begging in the streets. One can even consider all those who see the beggar on the streets (and experience disutility) as paying a cost for the failure of worker safety.

I agree that there might be some external costs associated with the risk, as you suggest, depending on the details of the situation. But that’s a very different claim than the claim that the risk itself is an external cost.

But I think I’m right that there is a better understanding of many downsides today than there was, say, a century ago.

For example, if in 1917 a 30-year-old construction worker got hit on the head by a falling object, but recovered from the concussion, but then went senile at age 65 instead of 75 and had to be cared for for for an extra 10 years, well nobody would notice.

But over time we’ve become more aware of a lot of fairly obscure risks due to sophisticated statistical analyses. So we’ve incorporated a lot of risk-mitigation expenses into budgets.

Hard hats, for example, are a very good investment.

But they do add, if only slightly, to the budgeted costs of infrastructure project versus some time in the past when the costs of workplace concussions fell solely upon the worker and his loved ones.

By the way, the famous management consulting writer Peter Drucker, who was born in Vienna in 1909 and died in Claremont, CA in 2005, claimed that the hard hat was invented in 1912 in Vienna by insurance company lawyer Franz Kafka.

Sadly, nobody else who has looked into this seems to have found much evidence for Drucker’s claim.

But the role of intellectuals who were insurance company staffers is pretty interesting.

For example, the day job of Benjamin Whorf of the Sapir-Whorf Hypothesis, was as an inspector for a fire insurance company.

The fire insurance industry around the time of Whorf’s employment was responsible for inventing the neologism “flammable” to replace the ambiguous traditional English word “inflammable,” which meant “could be set on fire,” but which could easily be read, disastrously, as “incapable of being set on fire.”

I’ve never found any evidence that Whorf himself played a role in this insurance industry-driven vocabulary change, but it seems like it might have helped inspired his perhaps overly ambitious ideas about the role that language can play in what is easy to conceive. (Orwell’s “Newspeak” is very Sapir-Whorfish.)

The fire insurance industry around the time of Whorf’s employment was responsible for inventing the neologism “flammable” to replace the ambiguous traditional English word “inflammable,” which meant “could be set on fire,” but which could easily be read, disastrously, as “incapable of being set on fire.”

One thing I have noticed is that my kids’ schools pay a lot more attention to certain things now than in my day:

1. My children were surprised to learn that I got in numerous fistfights in school and was never disciplined for it. The school was aware but turned a blind eye. That’s how you dealt with bullying and the attitude was “boys will be boys.”

2. Back then, all of the retarded children were herded together in one classroom. They received very little of the one on one instruction available today.

3. In my high school it was pretty common for students and teachers to have sexual relationships. It was known that certain teachers were doing it, but for the most part it was ignored. Nowadays, any suspicion of such a relationship would be carefully investigated.

4. Back then, if a student came to school with a bruise or a black eye the teachers typically ignored it. Nowadays such an incident would be reported and investigated.

So it seems schools pay a good deal more attention to various things nowadays. And attention costs money.

I am not saying this is the only reason for cost disease, but surely it’s a significant factor.

Along with education and healthcare, I imagine war is something that has been severely affected by cost disease, though it’s a lot harder to represent that on a graph. I think it’s fair to say that a D-Day-esque event would cost more today than it did in the 40s. And I think what links war, healthcare, and education, is that they’re very hysteria-prone. Deploying security guards to schools at enormous costs makes sense when parents are worried sick that their kids will be shot up. Spending hundreds of billions on military tech makes sense when a soldier dying for want of the best equipment would bring down a government. And referring patients with colds to get a battery of tests and an overnight stay makes sense when upshot of missing something serious is an enormous lawsuit.

I don’t know about that. Right now, we give the military a giant chunk of money and it’s easy to waste. But during a major war, wouldn’t there be an incentive to cut costs per soldier? I know ww2 was expensive but how much of that was necessity and how much was bloat?

I think you’re not accounting for the difference between total costs and wasteful costs. In a total war where you’re mobilizing every single resource to sustain an army, you’re going to be more dedicated to cutting waste. My contention would be that Nazi Germany had less waste than America did, especially in the later years.

I was originally inclined to disagree with this point. Reading on war, when you get into the details, makes it seem an inherently wasteful effort, and wasteful in terms of not just resources (such as money) but also lives.

Then I thought about it. Most of the government projects that I have see come in “under budget” (a proxy for ‘not wasteful’) have also been “on time”, if not faster. Popular examples include the Hoover Dam and the Supreme Court building. On the other hand, “over budget” and “late” seem to go hand in hand.

Although I am mostly uninvolved in the contracting side, my employer does government contracts, and the drawn-out contracting process, with specifications late, poorly written, or changed mid-project, is a constant source of grief at the (metaphorical) water cooler, and a major reason costs inevitably go up. I’m sure the government contracts people have similar complaints about the corporate side as well.

Getting back to the subject, while wartime projects are often wasteful in terms of manpower and materiel, there’s a massive incentive to get them done quick and into use which prevents the worst of the cost overruns. If you need that bridge / airstrip / warship ASAP, you may devote more people than you need to work on it, but once it’s usable, you’re done.

Contrast peacetime projects, where you need to pay the people going back and forth over the project plans and environmental statements before the first shovel of earth is turned over. We’re likely spending more money to make things perfect than we would if we were going for quick and dirty.

I have some exposure to common complaints from the government side of procurement (mostly DoD), though I don’t work on it myself. Many about their own side’s process rather than the contractors, perhaps surprisingly.

1. There’s a “too many cooks” problem in deciding what exactly the government wants to buy. This problem is endemic to the public sector under our system of government; there’s a too many cooks problem in pretty much every policy decision. It’s probably just an inevitable cost of distributed political power.

2. #1 is compounded by the ambition to be excessively transparent, specific, and fair about specifications and the criteria for contract awards. To remove personal judgment as much as possible in selecting contractors or, where impossible, to make it transparent and legally defensible. This is proximately caused by fear of bid protests, lawsuits, and Congressional attention, and by their own onerous regulations, but ultimately caused by our public’s hypersensitivity about bureaucrats channeling taxpayer dollars to private companies.

3. A major complaint about the other side is contractors’ opacity about their methods, suppliers, and cost and profit drivers. Contractors reasonably tend to see this type of stuff as proprietary or as part of their competitive advantage and are reluctant to reveal it, especially at the bid stage. But the government people resent feeling like they’re throwing specifications into a black box to see what kind of bids fall out, and complain that it makes their already-hard job of writing specifications much harder. And the asymmetric information problem makes them suspicious that industry is trying to cheat them/the public.

4. Every incentive favors contractors bidding optimistically. The nature of the projects and the very difficulty of awarding a contract means it’s almost always better to keep working with an underperforming or over-budget contractor than to try to replace them. Everyone knows this, and knows that everyone else knows it. Which damages trust at the bid phase and leads to more onerous and detailed contract provisions, raising costs further.

Add it up and you get procurement people trying to write excessively specific and fair specifications and award criteria, to please way too many interested parties within the government, without understanding much about how it will drive cost and schedule considerations, and while suspecting that every bid is some degree of unrealistic.

It’s a hard problem with no ready solutions. I will say though, that much more study and effort goes toward improving contracting for the big-ticket federal projects with impossible-to-ignore price tags. I suspect that contracting for smaller projects, especially below the federal level, has even worse problems than the ones described above.

Regarding McArdle’s comment on the quality of American governance versus other countries. She’s right that it goes back much further than Reagan. It would probably make sense to date the divergence to 1829.

I’d argue it goes back to 1789. “Government can do nothing right” is more true here than just about any other developed nation, and it’s by design. Our Constitution optimizes for pleasing the maximum number of constituencies that can agree on almost nothing to keep them from revolting, not for doing anything efficiently or effectively. The legislature is strongly biased toward inaction, and when it takes action, toward compromise deals that intentionally allow pointless bloat to ride onto sensible legislation just to get it passed. Our court is forced to strike down sensible executive action because the court simply rules on whether an action is Constitutional, not whether it makes sense or would work. The executive has gotten stronger and stronger probably as far back as Wilson, but it was designed to be crippled and ineffective. Heck, at first it made the loser the Vice President. Can you even imagine how much worse things would be right now if Donald Trump and Hillary Clinton were both in the White House?

We made a shitty, weak government on purpose. And arguably, that was a good thing. When Europe succumbed to Fascism and Communism, we didn’t. That left us as the world’s only superpower. But it’s only when we have extremely broad and obvious consensus, say winning world wars or putting a man on the moon, that we’re able to do things right. On any normal day, the structure of our government forces people who disagree and sometimes hate each other to work together and agree on how to move forward to get anything done. Predictably, that doesn’t work very well.

“Relatedly, a pet theory of mine is that “organizational complexity” imposes enormous and not fully appreciated costs, which probably grow quadratically with organization size. I’d predict, without Googling, that the the US military, just as a function of being so large, has >75% of its personal doing effectively administrative/logistical things, and that you could probably find funny examples of organizational-overhead-proliferation like an HR department so big it needed its own (meta-)HR department.”

It’s a truism that smaller startups have the ability to be more nimble and productive than larger firms. This is a product of the fact that humans are pretty good at coordinating with each other in small groups, but that our informal practices that let us do this don’t scale very well. I imagine you’re see this impact industries that require the coordination of skilled labor.

You’re basically just describing diseconomies of scale. Whilst some of the cost increases could probably be attributed to this, once again we have to look to foreign examples: The British NHS is one of the largest employers in the world, with I believe over 1 million employees.

Though the NHS has many troubles of its own and is far from perfect, it still appears to be far more efficient that the US healthcare system and not struck by diseconomies. Indeed, most of the European public services are likely to have much larger bureaucracies than those of the US, yet they are not afflicted by the same disease – or at least not as much.

I always basically assumed the health insurance markets have perverse incentives when it comes to medical expenses. Like, not just the problem of losing money every time someone uses a service, but a global problem having to do with medical expenses generally. Since insurance companies are factoring the costs of health services into their rates, it’s not actually in their interest to push global health costs down. They’re setting some hypothetical percentage off the top of global health costs-the bigger the costs, the bigger the margin. This can be made even larger by engaging in some forms of partial negotiation on a case by case basis after whatever price standards (here a very nebulous concept) there might be have been established. The larger the standard price is, the larger the rebate that can be extracted in such circumstances. Even if a substantial percentage of that rebate goes back to the consumer, this is clearly not the idea people have when they talk about “bending the cost curve.”

What about price competition between insurance markets? Shouldn’t that be driving the price of insurance down? Lots of people have talked about how opaque the health insurance market is. But on a more fundamental level, insurance markets cannot actually be competed down to near cost the way other goods are without effectively making health insurance a zero gain industry. It isn’t like a widget factory that, once it has factored in wages and production costs can technically run indefinitely on a revenue neutral basis and provide some material value to the economy. If a health insurance company isn’t charging more than it’s paying for, it has no function at all. It’s just a jobs program for bureaucrats. This is a problem for all kinds of finance mechanisms. If price competition is working, the service isn’t.

I don’t know why anyone would think private health insurance is a good idea. Maybe we have to have private insurance because it’s somehow better than all the alternatives, and we have to have some kind of finance mechanisms to deal with health costs (would a tax and a general federal health bureaucracy really be that bad, guys?) But one really has to be a zealot about privatization not to notice the problems with it.

Any explanation of the form “evil capitalists are scamming the rest of us for profit” has to explain why the cost increases are going towards bells-and-whistles rather than to evil capitalists.

To reiterate, creditors don’t care why something is expensive. The guys who make money on private college loans just want their cut of whatever the biggest piece of economic pie is they can get.

I wouldn’t want to underplay the regulatory story that some people want to tell here. But I also am as perplexed as BenWave is about why, if we’re trying to figure out why things are expensive, we aren’t looking at the people who have all the money. “Where is our money going?” is question with an answer that is already well known. Maybe the story about that money’s incredible journey from some guy’s weekly wage check, across space and time until finally deposited in some hedge fund manager’s retirement savings account where it gets to hang out for fifty years before being disbursed to his children through his will is really hard to tell for some reason. But there is a point where people are just being willfully obtuse about what’s going on.

Yes, the finance industry is really good. It has dramatically increased as a proportion of GDP for the last 40 years. But these trends have been going on longer than 40 years and apply to Europe, where finance is not involved.

What does the rest of society get back from the increased cost related to the financing? Increased access, obviously. Anything else? Is this enough to make up for it?
I’m not familiar with the background workings of it all; maybe financing greatly increases efficiency all around, or maybe is overall fairly exploitative.

It allows your purchasing power to continue rising even as your disposable income stays flat. Cheap credit allows you to spend more than you earn. In a purely free market, this would eventually come back to bite you, but Americans have a huge safety net on the back end to bail them out in the form of Social Security and Medicare, which drastically reduce the risk of elderly poverty.

You’re saying our entitlements allow us to spend into bankruptcy then skate by on medicare and SS when the bills come due. Hadn’t quite seen it put like that before. Is that good or bad? Intended or emergent?

It allows your purchasing power to continue rising even as your disposable income stays flat. Cheap credit allows you to spend more than you earn. In a purely free market, this would eventually come back to bite you, but Americans have a huge safety net on the back end to bail them out in the form of Social Security and Medicare, which drastically reduce the risk of elderly poverty.

SS largely comes from SS taxes, most people will get far less in benefits than they would have enjoyed if they had un taxed earnings.

SS largely comes from SS taxes, most people will get far less in benefits than they would have enjoyed if they had un taxed earnings.

This doesn’t seem obvious to me.

The benefits from money have diminishing returns, so the true ‘benefits’ seen by people(I imagine an incredibly small number of) who wisely invest that money and make more off of it than they get from SS is nebulous at best.

Most people probably would not be wise investors with the extra money.

Some estimates of the real rate of return on SS taxes are sub 2%. You only have to save roughly 2/3rds of the actual money at 4% real interest to equal a 2% return over 30 years of continual contributions. Given that the discount rates most economists use tends to be in the 5% range it is very easy for people to benefit more from money now than SS later.

Very easy is in the eye of the beholder. When you are talking about “most people” you need to take into account their likely behavior. They aren’t going to save much and what they do they certainly aren’t going to invest like a boglehead.

The typical Social Security recipient may or may not get as much in benefits than they paid in, depending on how you define typical.

The typical Medicare recipient gets a lot more in benefits than they ever paid in, due to medical cost inflation, and Congress has steadily increased the intake of the Medicare trust funds to pay for it.

Any explanation of the form “evil capitalists are scamming the rest of us for profit” has to explain why the cost increases are going towards bells-and-whistles rather than to evil capitalists. It seems pretty well established that most of the increases in college costs go to better gyms, more student life activities, more administrators et cetera. How does an evil capitalist get more profit by raising prices and using the money to hire more administrators?

Through financing.

I think the trick is to combine the key insight of the right–that these are all supremely distorted markets–with the argument made in your last quoted comment. Students take on massive loans to go to needlessly fancy schools, or patients rack up huge bills staying in pointlessly fancy hospitals, because they’re not actually paying for them in a psychologically meaningful way. The FIRE sector makes sure those choices are never streamlined, that ever-more-baroque financial products are on offer, that it remains easy to make the easy-but-ultimately-expensive choice, because it is massively profitable. As they do so, they constantly probe for loopholes and exploitations, forcing reactive regulation, thus driving up barriers to entry for competition and costs as a whole.

Thanks for providing some highlights, that thread was very interesting but quickly got hard to keep up with.

I think any explanation that starts with “well, we have so much money now that we have to spend it on something…” ignores that many people do not have so much money, and in fact are really poor, but they get the same education and health care as the rest of us. If the problem were just “rich people looking for places to throw their money away”, there would be other options for poor people who don’t want to do that, the same way rich people have fancy restaurants where they can throw their money away and poor people have McDonalds.

One thing we see in both education and health care is that those with money often get to dictate how everyone spends their money., through laws and regulations like the ACA. Status from positional goods also make it such that if health care and education cater to the spending power of the rich, others seeking these goods will end up paying more.

Any theory has to explain variation in the incidence of cost disease across time, across industries, and across countries.

I don’t think there’s been a huge increase in regulation, government interference, or information problems over this time, so I would guess that (1) explains most of the time dimension.

Some of the differences across industries are as predicted by Baumol, but many seem to correspond to (2)-(4) as well. Of course, these are confounded, because high-skill service industries tend to be more regulated, subsidized, and complex. But definitely those industries that don’t fit Baumol (e.g. real estate, construction) are probably mainly about (3).

Probably differences across countries are mainly about (2), (3), and regulation of (4).

One problem is that (3) implies the solution is less government intervention, while (4) implies the solution is more government intervention. I think these could both be true, and the solution is *better* government intervention.

My suggested solution is smarter regulation and copying practices that work in other countries. But I think a lot of this is just (1) and there isn’t much we can do (except maybe higher education is mostly signaling, and we should tax it).

I read most of the replies (I read parts of each reply, not not each of them in their entirety), and what is striking that even among the professional economists not one of them started out by clarifying the question. There are some basic concepts in how the cost increases come about that would give you different directions to pursue.

1. Total cost is different that cost changes. For determining governmnet influence total cost is influenced by total regulatory burden, but cost direction is driven by changes in the regulatory burden. This is a mistake that Mcardle makes here

Agriculture is also the focus of a great deal of government intervention, as are sundry things such as air travel, and we don’t see the same phenomenon there.

Total government intervention isn’t the question for changes in price levels (barring large changes in substitutions/elasticizes/superior goods, god damn econ is stupidly complicated), if agricultural intervention has been flat or growing at a rate slower than productivity increases then you don’t get regulatory cost disease, you get prices primarily influenced by market factors. Same for air travel, that has been heavily regulated for decades, but there were major deregulation periods where prices plummeted and outside of the TSA I can’t think of large regulatory increases recently.

2. Tax increases don’t tend to compound. For example Japan added three percentage points to the national sales tax a few years ago, over time this changes the price level once- ie current prices are 3 points higher than they would be without the tax, not 3X points higher where X is the number of years since the tax increase.

This is the same basic idea as 1- direction matters for cost growth, one off measures matter for cost level*.

3. The ‘opposite’ is true for economic growth. A regulation that prevents growth will prevent the compounding of growth. China is a good example here, they had a highly repressive economy that liberalized to a degree (over several different reforms) and saw not a single year’s jump in growth but decades of growth.

4. You can’t start from a static level. The question isn’t simply “why are costs increasing?” it is “why aren’t they decreasing?”. Technology should be increasing cost effectiveness in these areas over time so the cost disease is actually worse than it looks.

OK, I well oversimplified and missed an important point. The impact of a regulation can change over time. For example if you have a population of 1,000,000 and set the maximum number of doctors to 1,000 it will make a larger difference when the population changes if you set it at 1,000 doctors, or to 0.1% of the population. You can get regulatory creep or withdrawal overtime depending on how things are worded, a fixed fee for licencing will decrease in effect with inflation, or a fixed set of requirements can increase in relevance if other costs decrease.

The main point still stands that first you want to look at how the costs are increasing, be it large jumps or perpetual growth, which should point you in the right direction from the outset.

I feel like way too much of this discussion is focused on costs rather than on prices themselves. Aside from literal government-controlled monopolies, prices are not commonly set by calculating the cost then adding some small margin. Or at least, people who do it that way are dumb and will likely be out-competed by someone better. You charge what the market will bear. Customer willingness to pay is what drives prices, not costs. Prices rise when customer willingness to pay rises. But customer willingness to pay is often also correlated with higher expectations and demands of service quality.

So the question then becomes, why are Americans willing to pay more for a university education than the Japanese are? Why is the American government willing to pay more for a subway than the English government?

I think these are largely cultural or psychological questions. Perhaps the conception of “American exceptionalism” has created an American mind that feels entitled to “the best” everything, where no cost is too high. Of course we’re willing to pay more for college than the French – because we’re Americans and we deserve the best! We have very little conception of trade-offs, of sacrifices, etc. We behave like spoiled rich kids, because compared to the rest of the world, that’s basically what we are. Should anyone be shocked that spoiled rich kids spend a lot more for modest improvements as opposed to hard working middle class families who pulled themselves up by their bootstraps?

As an example, I got an online bachelor’s degree from a university that competes in the for-profit space (they were technically non-profit but structured similar to all the for-profit guys) and largely attempts to attract military personnel. The cost was, I believe $750 per credit hour.

In a truly remarkable coincidence, $750 per credit hour was the maximum level of reimbursement that the military was providing under their tuition assistance program.

In the long run, prices are mainly determined by costs plus market power (which determines the markup over marginal cost).

In supply and demand terms, you could say that long-run supply curves are pretty flat, because production can be scaled up and down as the economy moves factors of production between sectors.

In the short-run there can be sector-specific supply constraints, and thus upward-sloping supply curves. And regulatory restrictions (e.g. restricted licensing of medical professionals) can also restrict the supply. And of course the overall supply curve is upward sloping because the economy as a whole has fixed factors of production.

Thinking in terms of markup at all is backwards. A relic from a bygone era when we did not actually understand economics very well. Henry Ford famously had an idea of what the price of the Model T should be in order to sell a bunch of cars and make a lot of money, and instructed his engineers to figure out a way to produce the car for less than that.

“You charge whatever the market will bear” is what is currently being taught at top business schools. It’s what is explained in the pages of the Harvard Business Review. It’s what is implemented, in practice, at any company with a decent marketing department. There is no “markup.” There may be a required margin, but that’s a different consideration entirely.

Okay, now I’m curious. Can you explain how charging “what the market can bear” differs from a markup over marginal cost?

If you solve a profit maximization problem, you get a markup over marginal cost where the markup depends on the elasticity of demand — i.e. “what the market can bear”. You can express this in terms of profit margin if you prefer — it’s the same thing.

Do you disagree that if costs go up, companies will generally pass that on to customers? Pass through is a well-documented phenomenon.

Monopolies may set their prices by the market demand curves but competitive markets don’t. I think the difference is that a markup would be simply looking at the cost curve while in reality businesses consider the intersection of both marginal costs and marginal revenue.

The entire process is different. You are treating price as a function of cost. It is not. Pricing decisions should optimally be made entirely independent of costs. I’ve heard of some companies where the marketing department is literally not allowed to see what the unit costs even are.

If you define “markup” as “the difference between the retail price and the unit cost” then sure, there will always be a markup. But most people use “markup” as something to the extent of: “We take our unit costs and then we add ten percent because that seems like a good margin to make.” This is irrational and dumb.

Universities could buy all the computers they want and hire all the administrators they want and raise prices accordingly all they want. None of it would matter if people weren’t willing to pay those prices. Look at the market for prescription drugs. The cost of manufacturing a bottle of pills doesn’t change whether you want to sell them in the US or in France. But the prices are wildly different. You can cite a bunch of specific reasons about various regulations all you want, but at the end of the day, the difference is that one customer (U.S. insurance companies) is willing to pay a lot more than the other customer (the French government) is.

But the margin is not a measure of cost, it’s an interaction between price and cost. When you lower the price, the margin changes. Margins matter, yes.

But that doesn’t change the fact that your company should, independently of each other, be working on increasing the (perceived) benefit of the product (marketing) as well as lowering the cost as much as possible (operations).

Are you disputing that there is, in fact, a difference in willingness to pay between U.S. and foreign governments/consumers? Should we not examine why this is?

Henry Ford famously had an idea of what the price of the Model T should be in order to sell a bunch of cars and make a lot of money, and instructed his engineers to figure out a way to produce the car for less than that.

And succeeded in the long run because the price he demanded turned out to be a modest fraction above the cost of producing a useful car in the most efficient way. Luck? Extreme Smartness? Hardly matters. If the cost had come in higher, Ford would be a mostly-forgotten idiot who sold at a loss and tried to make it up on volume. Lower, and Buick et al would have undercut his prices and driven him out of business. Or he’d have lowered his own prices to match, and the bit about setting the price first would be a bit of irrelevant historical trivia.

Sometimes the only way to find out whether a thing can be built below a certain price is to allocate that much money and no more and give it a try. This is a useful thing to do, but it does not change the underlying economic reality – in a free market, in the long term, the survivors will be the ones who sell at cost plus a modest markup.

Technology is an *extraordinarily* strange market in which to insist that prices are independent of costs. My first big screen TV was priced around $1500. Ten years earlier a comparable TV would have been at least $10K. Ten years later I can see comparable TVs for $230. I would explain this as “Technological improvements cause production costs to plummet”; is the true explanation really “the market has decided that it doesn’t want TVs nearly as much anymore”? Then why do sales numbers keep increasing?

There’s also increased competition to consider; once the technology improves, someone can undercut you.
Also, once everyone who wants a $1,500 TV has one, in makes sense to lower the price, as few of those are likely to buy multiples.

Iphones have much more “brand power”(or whatever the official term is) than a TV. TV makers are closer to perfect competition while Iphones are closer to a monopoly. This means that Iphone can charge more and get away with it.

“Okay, I’m intrigued. Do you have experience in pricing and marketing decisions? What’s your background? What sort of thought process do you follow (or think companies follow) in setting prices?

Can you walk me through how you would figure out what the “profit maximizing” price is, or figuring out “what the market can bear”?”

I have no direct experience doing so myself. My background on this is that I went to a Top 20 MBA program that was known as a “marketing school.” I wasn’t particularly interested in marketing, but I figured I was there, so I may as well take a class. I asked my marketing friends which one to take and they all referred me to one particular professor’s “pricing management” class, which basically consisted of an entire semester of him hitting us over the head with a stick saying “CHARGE WHAT THE MARKET WILL BEAR”

As to how you find out what that is, well it’s very tricky. A lot of customer research is required. Surveys, focus groups, whatever. A lot of that stuff isn’t nearly as scientific as we might like, there’s certainly a lot of art involved in it. But it’s infinitely more scientific than “this is what our costs are, and this is how much profit we think we’d like to make, so our price should be this”

Increased competition is not a factor that lowers costs. It’s a factor that decreases customer willingness to pay. I’m willing to pay $10 for a beer at a football game because I have few options to buy beer. Whereas I’d only be willing to pay $5 for a beer at a bar, or $2 for a beer at a grocery store. The cost to produce and deliver that beer is probably not significantly different in any of those three options. There’s no reason to assume that stadium vendors and bars and grocery stores should enjoy hugely different profit margins. So why is the price so different if it’s supposed to be a simple factor of costs?

Lower costs are not a factor of competition, that’s simple experience curve stuff. As I said before, it’s an operational concern which is entirely separate from marketing concerns.

Demand-based pricing is tricky and we’re still figuring it out. Based on what my professor told us, a whole lot of companies are still living in the “cost-plus” dark ages. They regularly pay him several thousands of dollars to come talk to their marketing executives for a few days and tell them, “Hey – stop that. It’s dumb.”

IMHO the truth is somewhere in the middle and depends greatly on the market and your strategy. If you are called Ferrari, it makes a lot of sense to figure out what your (fairly price insensitive) customers are willing to pay. If you are supplying paperclips to Walmart, you are not going to get away with anything but a tiny margin over your costs.

The more interesting question is not so much how to set your price, but how to create a product/brand that people don’t consider interchangeable with cheaper products/brands.

“If you are called Ferrari, it makes a lot of sense to figure out what your (fairly price insensitive) customers are willing to pay. If you are supplying paperclips to Walmart, you are not going to get away with anything but a tiny margin over your costs.”

This is the same thing. Actually, the paperclip company is an even better example of my point. What actually happens here is that Wal-Mart tells them “this is what we are willing to pay” and you figure out how to produce them for less than that, or you don’t sell to them (and probably go out of business).

Wal-Mart regularly announces to their suppliers that they aren’t going to pay as much as they used to, and the suppliers scramble to figure out how to adapt.

Until Walmart doesn’t have leverage anymore because no one can produce any cheaper. So the only sane behavior of suppliers of interchangeable goods is to optimize their production process as much as possible and add a tiny margin.

“Until Walmart doesn’t have leverage anymore because no one can produce any cheaper. “

That’s a nice theory but it doesn’t actually happen. Wal-Mart doesn’t make insane, impossible demands. They know just enough about the costs of their various suppliers that they know it can be done. And if famous American brand name (I heard anecdotes about this from people who work at Kimberly Clark, as an example) can’t do it, they’ll find some random Chinese shop who can.

Having your stuff on Wal-Mart’s shelves is really important. More important to you than it is to them.

The idea is that prices for readily-reproducible commodities will tend to gravitate towards the average, “socially-necessary” cost price (not a company’s individual cost-price) + the average rate of profit (in the national economy if there are significant barriers to capital flows across borders, or in the world economy if capital is 100% free to migrate to the highest profit opportunities).

The reasoning is, let’s say flatscreen TVs suddenly become very popular among consumers, such that they are willing to pay $100,000 for one. Suddenly flatscreen TV manufacturers will be making huge, above-average profit rates.

However, investors will notice. They will flood into the flatscreen TV business, and new competitors will spring up who will, on average, be able to produce flatscreen TVs at whatever happens to be the typical, “socially-necessary” cost price of doing so. (Some will be lower cost and end up with above-average profits, some higher cost with lower than average profits).

As new competitors spring up, they will drive the supply of flatscreen TVs up up and up until there is once again enough heated competition among flatscreen TV producers to capture the given market for their products to start to drive the price of flatscreen TVs back down. Investment will continue to flood in, and supply will continue to rise, until an average flatscreen TV producer is once again making an average rate of profit.

So, in the medium-run (3-10 years, or however long it takes new flatscreen TV factories to get set up), the price of flatscreen TVs will have nothing to do with consumer preferences (only the quantity produced will vary according to consumer demand). Instead, the medium-run center-of-gravity for fluctuating market prices for flatscreen TVs will be this “price of production” that allows a flatscreen TV producer of average efficiency (with average, “socially-necessary” individual cost-prices for its inputs) to obtain an average rate of profit.

The implication is, the subjective theory of value is bogus. Prices are, in the medium-run, governed by objectively given factors: the socially-necessary cost-price, and the average rate of profit.

Of course, then you have to ask what determines the socially-necessary cost-price and the average rate of profit, and there you need a theory of an objective factor of some sort such as “socially-necessary labor time” to account for how cost-prices and average world rates of profit can change over the long-run due to innovation and influences from class struggle.

Note that a common misconception of the labor theory of value is that an individual company’s “rate of surplus value” determines its profit rate. This is the (unfortunate) impression that Marx gives in Volume I at the highest level of abstraction before he gets around to introducing some essential complicating factors that make the real world differ from Volume I’s most abstract conception of the labor theory of value.

In Volume III of “Capital,” Marx gets around to clarifying that an individual company does not actually earn profit on its own surplus value. Instead, the surplus value of all the companies in the world end up in a giant worldwide pool of surplus value that forms the “average rate of profit,” and individual companies, on average, actually obtain their individual profits from this giant pool of average profit in proportion to what aliquot part of the total world capital their individual capital is.

Among other interesting implications is the idea that labor-intensive industries with high “socially-necessary” input costs end up contributing most of the surplus value (surplus labor time) to the worldwide pool but actually end up reaping disproportionately little in terms of profit because they, like everyone else, can typically only expect to earn an average rate of profit on top of their lesser amount of capital invested. In this way, the capitalists in capital-intensive industries (which typically corresponds to the capitalists in the 1st world) end up “exploiting” not just workers, but fellow capitalists in labor-intensive industries in the 3rd world.

Just to jump in here- Matt M is correct, and his critics are correct. Sans competition prices will move towards what consumers are willing to bear which is the definition of monopoly profits- the amount above the equilibrium rate that a company can charge due to a lack of competition. When it comes to government pricing this is frequently in effect. When it comes to competition others entering, or threatening to enter, the market will keep prices near the equilibrium.

They’re also both right in another way. In an efficient market, the price is set where the supply and demand curves cross, but it’s also where price equals marginal cost because profit is maximized by firms when marginal cost equals marginal revenue, thus, in an efficient market, the firms that survive are those able to produce at a marginal cost that exactly equals the equilibrium price the market will bear (with marginal cost in economic terms including a normal accounting profit, so production cost plus some markup).

The only trouble with this explanation is that though it is technically correct, most people don’t know or forget that an efficient market has a very specific meaning in this case. It means no barriers to entry (ie no startup costs), no asymmetrical information etc, etc. Such a world doesn’t exist so reality doesn’t match very well, except in a few odd places (and usually the government steps in to force prices up so oh well).

So Matt M is right, companies look to maximize revenue not charge the marginal cost, but the profit maximizing price (or prices since we live in a world of price discrimination) will depend on how close we are to such hypothetical competition. The closer and the closer to the marginal cost prices will be.

The only trouble with this explanation is that though it is technically correct, most people don’t know or forget that an efficient market has a very specific meaning in this case. It means no barriers to entry (ie no startup costs), no asymmetrical information etc, etc.

The standard analysis you are referring to does not assume no startup costs–startup costs are one of the reasons why average cost is not automatically equal to marginal cost.

And “efficient market” isn’t a description of the sort of facts you list, it’s a description of the conclusion–a conclusion for which some such set of facts is the starting assumption. Thus, for example, while perfect competition is one way of getting an efficient market, perfect price discrimination is another.

The only trouble with this explanation is that though it is technically correct, most people don’t know or forget that an efficient market has a very specific meaning in this case. It means no barriers to entry (ie no startup costs), no asymmetrical information etc, etc.

The standard analysis you are referring to does not assume no startup costs–startup costs are one of the reasons why average cost is not automatically equal to marginal cost.

And “efficient market” isn’t a description of the sort of facts you list, it’s a description of the conclusion–a conclusion for which some such set of facts is the starting assumption. Thus, for example, while perfect competition is one way of getting an efficient outcome, perfect price discrimination is another.

The standard analysis you are referring to does not assume no startup costs–startup costs are one of the reasons why average cost is not automatically equal to marginal cost.

For goods on a market to sell (in perpetuity) for the marginal cost of production one of two things must be true*. Either there must be no startup costs, or some number of those goods had to be sold above the marginal cost for long enough to cover the non marginal costs.

This flows logically from a profit motive. If a factory that costs $1 million to build can produce 1 million widgets at a marginal cost of $1 each then no competitors should be willing to enter the market unless the price of widgets is >2$.

Thus, for example, while perfect competition is one way of getting an efficient market, perfect price discrimination is another.

Conceded, but the above description is fundamentally price discrimination across time where early adopters pay more and late adopters pay near the marginal cost.

Here is the issue I have, you only get to this point by assuming that an efficient market already exists which is in effect assuming that there are no startup costs (or other barriers to entry). That this statement is not explicit (or explicit enough) is the cause of much confusion. Matt M gets frustrated because business schools say “what the market will bear” and then an economist comes by and says “in an efficient market the marginal cost is what the market will bear”, but business schools are teaching people to go out and find the most saturated markets and wedge themselves into them, they are attempting to teach people (to be very generous) how to create new inefficient markets that can be exploited for profit.

The end result is that you only price = marginal cost if you are taking a portion of the market as your measuring stick. I might pay $100 for my smart phone, but only because someone else paid $500 for one. If those purchases happen at the same time but in different places then we have “price discrimination”, if those purchase happen in a different time then we can cut one of them out and say “hey look, and efficient market for this one sale”*

*It is worse than this, as the $100 isn’t automatically at or above marginal cost either, a user who doesn’t donate to Wikipedia gets his goods for less than the marginal price of production/distribution and is covered by those that do donate.

In conclusion I will accept that what I wrote is not the textbook definition because the textbook definition is misleading and my attempt is closer to both the real world and what I think would bridge the gap between Matt M’s understanding and the textbook answer.

Matt M gets frustrated because business schools say “what the market will bear” and then an economist comes by and says “in an efficient market the marginal cost is what the market will bear”

To clarify – what frustrates me isn’t that some people are talking about costs, it’s that nobody is talking about customer willingness to pay.

But I still don’t think your conclusion above is correct. Nobody ever responded to my pharmaceutical example. The marginal cost of producing one additional pill of Zyrtec or whatever is essentially zero. Virtually ALL of the costs are “start up costs.” Even if you were to average out those costs though and come up with an “average cost” number, it would be one number for all Zyrtec pills.

So how is it that Zyrtec sells for $X in the US, but sells for $X/5 in England?

“Well, that’s a poor example because that just means it’s an inefficient market,” is what I assume the response would be. But virtually every market is inefficient in some degree or another. There is no “perfect competition” observable in the real world. It’s just a conceptual device made up by economists. One of the big problems I have with classical economics is that it spends way too much time on arguments like the one you are having right now and way too little on responding to real life examples like what I am pointing out.

The cost of drugs has virtually nothing to do with the cost of their production. Same thing with the cost of iphones. You can theorize that over the long term the price of iphones and the marginal cost will converge if enough competitors enter the market, but we all know that will never happen – the brand value is too high and the timeframe for popularity of tech devices is too short.

But I’d really much rather have less bickering over efficient markets and perfect competition and more theorizing over my original question, “Why are Americans willing to pay more for certain things (but NOT for certain other things, and less for some things) than the French are?”

If a factory that costs $1 million to build can produce 1 million widgets at a marginal cost of $1 each then no competitors should be willing to enter the market unless the price of widgets is >2$.

Why doesn’t the factory in that story produce more than 1 million widgets?

If the answer is that the only possible size of the factory is the one you have described and it can only produce a million widgets, then the only margin on which output can be expanded is building another factory, and the relevant marginal cost is $2/widget.

If marginal cost at a million is really $1, then the factory can produce more widgets at $1 each. If that is true for an unlimited number, then average cost keeps falling forever and the firm is a natural monopoly. If, more plausibly, marginal cost keeps rising as you expand production beyond a million, you end up with an equilibrium at which price = AC = MC.

Why doesn’t the factory in that story produce more than 1 million widgets?

I’m giving perfect information to demonstrate the point, how many actual widgets would be produced during the life of the factory would not be known prior to building the factory.

If the answer is that the only possible size of the factory is the one you have described and it can only produce a million widgets, then the only margin on which output can be expanded is building another factory, and the relevant marginal cost is $2/widget.

If marginal cost at a million is really $1, then the factory can produce more widgets at $1 each

Read these two bits together, if the marginal cost is only to be known after the number of widgets produced the prices will never reflect the marginal cost as prices are set (or negotiated if you like) pre-sale, and marginal costs calculated post.

Once again you are pulled back to the conclusion that marginal cost only drives sale prices under conditions of no start up costs or infinite production.

if the marginal cost is only to be known after the number of widgets produced

That’s not what I am saying. The marginal cost is a feature of the production function. If the production function is such that each factory can only produce a million widgets, then producing more widgets requires another factory, at a per widget cost of $2. If the production function is such that one factory can produce an unlimited number of widgets for a dollar each, then marginal cost is $1. But in that situation the factory won’t be producing only a million widgets, unless you are assuming it is a monopoly and that is the profit maximizing quantity–in which case marginal cost is still equal to a dollar but the firm is not selling at marginal cost.

What depends on the number of widgets actually produced is average cost.

If the production function is such that each factory can only produce a million widgets, then producing more widgets requires another factory, at a per widget cost of $2. If the production function is such that one factory can produce an unlimited number of widgets for a dollar each, then marginal cost is $1.

The net result is the same. In a situation where the total output of a factory is known then the cost of setting up the factory is calculated into the marginal cost. When the output is unlimited then prices should hit marginal cost of production. Actual world is neither known fixed production, nor unlimited potential production, limits are expected but unknown and under such conditions startup costs will prohibit prices of goods from reaching the marginal cost of goods.

Basically, yeah. The two arguments aren’t even in opposition, they just point out two different boundary conditions on capitalist production. The level of competition determines which condition will be the most relevant in any given market

I also want to directly address the question of administrators in college costs. Here is an article from 2011 with some numbers:

Between 1975 and 2005, total spending by American higher educational institutions, stated in constant dollars, tripled, to more than $325 billion per year. Over the same period, the faculty-to-student ratio has remained fairly constant, at approximately fifteen or sixteen students per instructor. One thing that has changed, dramatically, is the administrator-per-student ratio. In 1975, colleges employed one administrator for every eighty-four students and one professional staffer—admissions officers, information technology specialists, and the like—for every fifty students. By 2005, the administrator-to-student ratio had dropped to one administrator for every sixty-eight students while the ratio of professional staffers had dropped to one for every twenty-one students.

They state the numbers to sound pretty bad, but let’s put that in terms of numbers per 1k students. Then that’s an increase from 32 to 62 admin+staff, compared to a constant 65 instructors. That is, admin+staff doubled while instructors stayed constant. But because instructors were in the majority, total employees only increased by 32%. So that alone should only increase labor costs by 32%, and total costs by less than that (since labor costs are only a fraction of total costs).

But it’s not even that bad, because administrators and staff are different things. Administrators are the really bad guys we think of when we imagine fancy deans and lawyers and so on, making lots of money. But administrators just increased from 12 to 15 per 1k students, accounting for just 9% of the total increase in admin+staff.

So most of the increase is in staff. That’s probably mostly the people taking care of the grounds, the gym, the residency halls, and yes, running some of the bureaucracy (student aid and so on). But some of that represents an actually quality increase (like a gym, nicer buildings, and helping students figure out their student aid), and those people are probably paid less than faculty or administrators since most of them are relatively low-skill.

Long story short, while there’s definitely been an increase in administrators and staff in higher ed, I don’t think that explains much of the cost increase.

At the level of the firm, things that don’t make economic sense but persist over time can be explained by either culture, regulations, or taxes. That’s it.

For a cultural example, concert tickets were often priced below what secondary markets were getting because of fear of empty seats, and the norm by many artists of trying to make their work as accessible as possible. But that is changing and artists are now pricing nearer to actual market demand levels.

I think any comment that doesn’t compare the US to other nations can’t really reliably find the true issue(s), since a lot of the things that are said to be the true culprit here are also – or even moreso – the case in other countries, without a similar cost disease.

Since several people here claimed that the cost disease isn’t as bad in germany, I happen to be from germany, and I also happen to know that we have a relatively decent education, but pay a fraction of the US for it(so the claim absolutely fits my known data), I’ll point out a few key differences between the US and germany:

1. Prestige universities: There is no such thing in germany. in the US, even every layman knows Harvard, in germany, some universities are said to be slightly better than others in certain areas, but you only know that if you actually inform yourself(which most students do about the unversities they consider going to, but nobody else). If you go to any firm with a harvard degree in the US you’re considered inherently better(TM by the Ivy league) than if you’re from everywhere else. In germany, any employer will differentiate people from different universities by simply asking them which classes they took and how good they line up with what they’re supposed to do.
Given this, you would expect the universities of the US to waste a lot of money for prestiguos stuff compared to germany, so they continue to be well known and to attract the important people, and to allow students to get to know each other through cool activities, since knowing a lot of important people is the true thing people pay for when going to the Ivy League. Exactly this is what’s happening.
This would also result, as Scott himself pointed out before, that new, cheaper universities can’t compete because of the lack of prestige, which completely destroys market functions.

2.(Almost) no loan industry and fixed money for universities except through attracting firms: In germany, the state completely pays for everything universities offer you, except a neglible enlisting fee that is student-controlled and doesn’t even go to the university itself(usually mostly to free public transport for students). The state AFAIK pays a fixed amount of money dependent on certain criteria, especially student numbers.
So the university has no chance but to make do with the money it gets, the only bloat I occasionally hear of is student number bloating, but even that is kind of hard to abuse; If you take in too many students without the appropriate number of teachers/rooms etc., your university will get a bad rep, which in turn will lead to less students turning up in future years, so you’ll get a money problem later on.
The universities also can gain a sizable amount of money from firms, but the firms only give money to universities where they feel investing is worth it, which further incentives the universities to be transparent and efficient.
Since the university can’t take any money from the students itself, it can’t bloat loans either.
In other words, universities couldn’t really bloat costs here even if they wanted to, because the only one dependent enough on it to it to be willing to pay it(the student) isn’t the one paying for it, and the others try to pay as little as possible and demand proof of effiency for any and all cost increase.

3.litigation costs: I can’t say too much about this since I have little contact with the law, except that from my laymans POV, there are far fewer cases here, usually about far more serious issues and about far less money. This would obviously result in less administrative and regulatory bloat, which again is what we’re seeing.

4.mentality: This is my weakest point, and I’m not even sure whether it’s true at all, but it still might be worth noting: Germans have a completely different mentality than most americans as far as I noticed. They’re much more conservative about spending money and they like prestige less than americans. In fact, for germans, prestige can often be a reason to NOT go somewhere, because they dislike both the arrogance and superficiality they themselves link to it, and they don’t want to be seen as arrogant and superficial themselves. Note that I’m talking about common perceptions here; I’m not saying that prestigous institutions actually are more arrogant and/or superficial.

And lastly, a few general thoughts:
1.”big government is the culprit” doesn’t seem to be fitting to me, since the goverment here is much more involved in both health care and education than in the US.

2.”Evil capitalists extorting money” might be possible through the loans instead of through the universities. On the other hand, it seems difficult to imagine how thos evil capitalists get the universities to spend more in the first place, and student grants are a thing, and the loans AFAIK don’t have a big margin anyway.

3. If you view money as a proxy for power after you have everything, or most stuff, you’d be willing to hedonistically spend it on, than some university/clinic administrators might actually prefer for surplus money to pay for extra staff even if it isn’t necessary. It allows you to lord over more people(giving you both the feeling of power and actual power), you don’t run the risk of seeming greedy, and it makes yourself feel good because you “help” those people. This might also explain the tendency of big-name firms with high reliable income to bloat so damn much in addition to needing more administration and logistics. Of course, it’s something people don’t do consciously, they’ll always have an explanation why these people really are necessary both for themselves and others.

4.Loans disconnects price from gain to some degree. Unless you’re from a culture that fundamentally dislikes loans, they make stuff seem cheaper than it is because we have to pay it so much later, which is already known to be a strong psychological factor. Usually this is balanced of by the fact that you need someone willing to actually lend you that money, who will need to pay it immediately in full and thus will check whether it’s really worth it, but especially in education, this bar is pretty low. Even some humanities with almost no chance of getting a decent-paying job will often get a loan anyway.

Almost everything in this post hinges on the cost disease actually not being as bad here than in the US, and on my knowledge/impressions of germany actually being true. So if you know anything better than me, please feel free to correct it.

Interesting that in Germany the income per student for universities is fixed and set by the government. This seems like some form of collective bargaining being well implemented. Students still have a choice which university to attend allowing competition to select for ‘better’ universities from this point of view, however a proxy for the students as a whole bargains about the price. This would work much better to control costs than individual students having to bid against each other. It’s very much like a union in reverse!

Come to think of it, such a system is also how healthcare works in New Zealand for the most part, and we have quite low healthcare costs per citizen.

I’m not sure the F-35 is a good example of cost disease. It’s breaking new ground in terms of systems development, and that’s always been expensive. There are other, complex defense procurement systems which work pretty well. Notable examples are the P-8 and the Virginia-class submarines. However, both are fairly simple extensions of existing technology. (The P-8 is closely related to the 737, and the Virginia was explicitly developed as a relatively cheap SSN.) For that matter, DDG-51 procurement has been an overall success story. The problem is that the DoD has, for reasons that are hard to explain, started dressing up R&D programs as procurement programs.

Maybe this is more evidence for Wrong Species arguments above about war being good for efficiency, or at the very least evidence for arguments that the increasing complexity of the modern era makes getting things done quickly much harder. The F-35 went from contract to deployment in 19 years. Meanwhile, it took 21 years from contract for the B-17 to deployment of the B-52, three generations of heavy bomber later.

If you look at each generation of fighters, they keep getting longer. The rise in prices is even faster (this graph is terrible, but I’ve seen better ones that show similar results, I just can’t seem to find them right now). War is only good for efficiency only in the very narrow sense that there are large economies of scale in manufacturing. it takes X amount of money to design a plane and Y to build a factory capable of making them, the more you make the more you spread out that cost.

On the topic of litigation:
Canada would seem like a good control group since it shares most of the culture and structure of the US with regards to higher Ed. and housing but has the loser pay rule for lawsuits, Making litigation a far riskier prospect for most plaintiffs (mind you we still have accident chasing law firms, but they tend to focus on quick settlements)

A thorough analysis of P&L statements for schools/universities/hospitals/construction… in 1950 compared to 2017 would probably yield very interesting insights.

Additionally, running the same analysis for businesses less prone to cost diseases (retail, home equipment, automotives…), might highlight how they are different from those struck by the plague.

If it is confirmed that wages and profits aren’t the culprits here, then it must be some sort of overhead thing. The ratio (cost of direct production) to (total costs) must shrink somehow.

Now, why to overhead costs skyrocket? I would put my money on compliance.

Case in point : in France, the law requires ALL new homes to be compliant for disabled persons even though disabled persons represent only ~5% of the population. This has greatly increased the cost of building new units.

Every now and then, whole industries go through a low-cost transition where people reconsider the old ways of doing business and rebuild processes from the ground up in order to slash costs. Compliance is a prevents that from happening by introducing friction.

Another argument for compliance as the main culprit is that most (if not all) industries subject to the cost disease are local (ie. national) businesses. As soon as you can import (aka avoid US compliance), the cost disease disappears. Local players either die, adapt or lobby for lighter compliance.

Maybe a good time to reread the post How Likely Are Multifactorial Trends?

The sum of independent Poisson processes is another Poisson process. So in the case of that particular model, there is no useful distinction to be made between single-factor and multi-factor explanations.

Imagine it was ten million different factors, each accounting for one ten-millionth of the decline. But that seems stupid. For example, since there are only about ten million criminals in the US, we could structure this as one factor per criminal. Imagine that, in 1994, each of America’s ten million criminals independently and coincidentally had a major life change that made crime seem less attractive. That’s ridiculous.

So suppose we model each criminal as an independent Poisson process that produces criminality at some rate. The rate may vary from person to person. And perhaps our intuition tells us that it is unlikely that we would see a swing in the overall crime rate purely by chance, because it is unlikely that so many independent factors would all align. But the mathematics tells us that the system is equivalent to one in which there is only a single Poisson process that produces criminality at a rate equal to the sum of the individual rates. And about that system our intuition tells us that certainly there could be random trends and fluctuations, after all there is only a single random variable involved.

There can’t be “other options for poor people who don’t want to do that, the same way rich people have fancy restaurants where they can throw their money away and poor people have McDonalds.” Because they’re largely illegal. If being in the Restaurant Industry required you to hire a chef with a college degree followed by 4 years culinary school followed by a 2-4 year apprenticeship at a Michelin star restaurant, Mcdonalds would not exist.

“Any explanation of the form “administrative bloat” or “inefficiency” has to explain why non-bloated alternatives don’t pop up or become popular. I’m sure the CEO of Ford would love to just stop doing his job and approve every single funding request that passes his desk and pay for it by jacking up the price of cars, but at some point if he did that too much we’d all just buy Toyotas instead. Although there are some barriers to competition in the hospital market, there are fewer such barriers in the college, private school, and ambulatory clinic market. Why hasn’t competition discouraged administrative bloat here the same way it does in other industries?”

There is a fairly straightforward explanation for medicine.

There are more than a “few” barriers to competition in hospital and clinic markets.

Medicine is the only industry where the profit incentive is aligned with restricting access to care and providing low quality care. Imagine the quality of cars or computer chips that you would get based on that business model. The system has evolved over the past 30 years based on a false premise of overutilization of health care services to the point where specific types of low margin care are unquestionably rationed. A huge administrative infrastructure and regulatory framework has developed to assure that this structure not only continues but is indemnified from any liability based on the rationing decisions. This is really unprecedented power for a rationing business and I continue to be astonished by the number of people who never realize it until they are in the cross hairs of one of these rationing decisions.

The only way the rationing of medicine could occur was through the intimidation and manipulation of physicians. It turns out that did not take much. Physicians as a group are generally a bunch of wimps when it comes to mixing it up with politicians and businessmen. Most people have forgotten about the pre-911 FBI investigations of physician billing and the use of billing fraud to keep docs churning out mounds of meaningless paperwork. Certainly inefficient but there was another message or two there as well.

There really is no competition when a rationing organization tells you what services and physicians are available to you based on how they want to make money. They don’t have to compete – they just have to get you or your employer to pick them out of a line up of equally poor to mediocre performers. In most markets that comes down to 3 to 5 providers that offer nearly identical plans and no way for anyone to assess the best possible treatment available.

In that setting administrators and not physicians rule. It is interesting that their battle cry in the 1990s: “Times are changing doc – you are no longer in charge.” is now an absurd reality.

The size of this issue is daunting..we need the education & healthcare spending for all major countries and than compare it to each other , adjusted for school size, treatment, quality, and dozen other factors .

One possibility is that schools and districts are sitting on a lot of unused funds. It could be that spending includes money that is unused or in various fund accounts

I have no clue how much this happens generally, but one very specific example is the First Five foundations in California. They were originally set up by ballot initiative on the theory that preschool access is the key to escaping poverty and they fund preschool education and now healthcare initiatives, exclusively for children 5 and under. They’re funded by tobacco taxes. They’ve run an enormous surplus for their entire existence, but since the money was earmarked in the original ballot initiative, it can’t be used for anything else. It has to just sit there doing nothing because there aren’t enough worthy programs to spend it on, while the rest of the state government is trying to figure out how to close a massive deficit. It’s one of many textbook cases from California of why legislation by popular ballot is such a terrible idea.

I think the probability of multivariate trend is high in this case. The argument against those was about how unlikely it is that a bunch of trends change direction at the same time in a way that causes a specific change, like an increase in crime.

However in this case, cost disease affects some industries and not others. The probability that a bunch of things would change in a way that would influence one of many possible set of trends (the costs in different industries) is much larger, just like in the birthday paradox.

>Any explanation of the form “administrative bloat” or “inefficiency” has to explain why non-bloated alternatives don’t pop up or become popular. I’m sure the CEO of Ford would love to just stop doing his job and approve every single funding request that passes his desk and pay for it by jacking up the price of cars, but at some point if he did that too much we’d all just buy Toyotas instead. Although there are some barriers to competition in the hospital market, there are fewer such barriers in the college, private school, and ambulatory clinic market. Why hasn’t competition discouraged administrative bloat here the same way it does in other industries?

Because the government pays for these sectors, or people pay very indirectly, so the competition, to the extent that it exists at all, is on the basis of quality, not cost. No one picks the healthcare or education option that’s 90% as good but costs 10% as much. Usually they aren’t even aware of the cost.

There are lots of interesting points here, but I have to call out one that’s demonstrably false (from Sohois):

“I would venture that many firms have seen huge increases in both revenues and costs so that when you adjust profit for inflation it hasn’t really changed at all, on average.”

Looking at the aggregate, that’s not true. Here are constant dollar S&P 500 profits per share by year – http://www.multpl.com/s-p-500-earnings/table . These are earnings in real terms: already adjusted for inflation, to put all the numbers in constant 2016 dollars. The peak in the 1980’s was a level of 47.59 in 1988. The full year total for 2015 was 89.09. So that shows long-term, inflation adjusted growth of 2.3% per year.

The growth is even larger if we look at non-peak years from the 1980’s. Going back to 1985, the long-term inflation adjusted growth in total S&P 500 earnings was 3.4% over 30 years.

It’s not a “company” to “company” comparison at all. It’s an aggregate measure for the S&P 500. It’s absolutely a fair comparison for “how much are large U.S. public companies (i.e., the S&P 500) earning in total”.

It’s useful, but not for this purpose. To measure aggregate profit margin, you can just look at corporate profits as %GDP. That measure has risen dramatically in the past few decades, so realist50’s point holds.

I think any explanation that starts with “well, we have so much money now that we have to spend it on something…” ignores that many people do not have so much money, and in fact are really poor, but they get the same education and health care as the rest of us.

I’ve always understood the ‘rich people throwing their money away’ explanation as describing a political choice, not a personal one. That is, when people on average get richer, we feel the standards of what’s an acceptable amount to spend on certain things have risen, and so we become much more willing to support new regulations to mandate that increased level of spending for everyone.

No, they really, really don’t. Malthusian traps happen when you have a growing population and the increase in aggregate demand outpaces the increase in total productivity for some category of goods, usually because that productivity depends on some fixed resource. The classic example is food in a subsistence agriculture economy, where everyone needs ~2000 calories a day but there’s only so much arable land, and where more people working the land increases its productivity but there are diminishing returns.

Banning low-quality goods in such a situation doesn’t improve productivity or otherwise increase the supply of goods; it just means fewer people can afford goods of any kind. It could be expected to slightly increase the supply of high-quality goods, because the resources previously dedicated to producing the cheap ones will now be dedicated to them, but all that means is that instead of e.g. 100 people living in dormitory-style housing, you now have 30 in the cheapest legal housing and 70 homeless. This is only an improvement if you don’t care about what those 70 people wanted. (Numbers made up for illustrative purposes.)

Sorry, I should have been clearer: if we’re in a Malthusian trap, these policies help in the long term, if you consider “a few, mostly happy people” a better outcome than “many, mostly miserable people”. They change the long-run equilibrium from “100 people living in dormitory-style housing” to “50 people in the cheapest legal housing, plus one or two homeless.” Of course, the transition from the first equilibrium to the second is really terrible, so you want to just aim for the second from the beginning.

I think this is exactly the point of like 4 of the 10 examples in Scott’s epic post, “Meditations on Moloch”. Check out e.g. his paragraph on the Rats of NIMH.

That logic only works if we expect the policy to have a long-term effect on population growth, and by some means other than killing the people that can’t hack it — the long-run equilibrium may well be 50 people in legal housing and one or two homeless, but if that happens because one or two people freeze to death every year, that is not much of an improvement.

The point about the Malthusian trap is actually Ricardo. He starts with the iron law of wages–in very long term equilibrium, wages will be at that level at which the working population just reproduces itself, because if wages are higher than that the population is growing and driving down wages. He recognizes, of course, that in a growing economy wages may be above the long term equilibrium for an unlimited length of time.

He then goes on to point out, as I do not think Malthus or Smith did, that what the wage is at which the population just reproduces itself depends on the tastes of the population–how well off they have to be before a couple is willing to bear the cost of producing and rearing children. He concludes that the friends of mankind should wish that the workers have luxurious tastes, since that will result in a higher wage in long term equilibrium.

Something I think is important to consider specifically within the higher education market is the role of prestige. (Because, let’s face it, much of the value of a college degree, especially a non-STEM degree, is not what you learn but what you are able to signal.) If you look at the top 20 private universities, the top 10 public universities, and the top 10 liberal arts colleges, none of these institutions were founded within the last 50 years. So there is a very real barrier to entry in the market for “prestigious education”- the ability to build a reputation.

If Joe Entrepreneur believes that college is currently massively bloated and overpriced, and that he can figure out a way to deliver the essential service of education for a fraction of the cost, he still needs a plan for convincing employers to hire his graduates. To do that, he needs a plan for convincing higher quality students to attend his brand new “lean startup” university- which they will be reluctant to do if they don’t believe that employers will view their diploma as a strong signal of intelligence/work ethic/white collar socialization.

Look at for profit colleges- tuition at the University of Phoenix is about 15k a year. Now, that’s massively overcosted relative to the quality of the education you get (which is abysmal), but even if UPhoenix stopped skimping on instruction and only skimped on amenities like an athletic program and a nice campus, COA would still be much lower than at mainstream universities. The issue is that any “good” startup college that aims to cut costs by reducing bloat needs to somehow differentiate itself from the University of Phoenix. Simply saying “we have good teachers” won’t cut it because A) everyone says that and B) a big component of university quality is matriculated student quality, and quality students are heavily incentivized to go where quality students have gone in the past.

So even if it would be better in the long run for Joe to start his “lean” college and for bright students to go there instead of places with absurd overhead, nobody with reasonably established alternatives wants to take the risk of being a member of an early matriculating class at Lean University, and because Joe Entrepreneur knows this, he’s not gonna start Lean University and market it to quality students. He’ll market it to students who can’t get in anywhere else, which means money spent on quality instruction is mostly a waste (because the target demo is idiot consumers who just want a piece of paper that says “College Graduate (sorta)”). This is where UPhoenix comes from, and why we can’t get cost-conscious universities that aren’t shitty.

And all this is before one considers that consumers aren’t actually perfectly rational, and are “okay” with absurd amouts of debt as long as they don’t have to think about how financially screwed they are while they enjoy the best four years of their life at a top 50 private university with two rec centers, an Olympic sized swimming pool, twenty different varsity sports teams and a sprawling administration.

– Use Silicon Valley prestige to substitute for traditional university prestige. Sign up some big tech names to be on the board. Say “Disruption!!!” often and loudly to the media, who will likely eat the story up.

– Sign up big name professors as consultants in designing the methods and curriculum. Startup money can fund it; it’s a one-time cost.

– Sign up big-name companies to commit to hire (or at least interview, if you can’t get “hire”) some proportion of your graduates, if certain criteria are met.

– Use some of your startup money to bankroll free tuition for some/all of the first few entering classes.

All of this seems relatively obvious and I’m sure it has all been tried. The fact that I haven’t heard much about it suggests it has been less than overwhelming successful. Which leads me to suspect your final point is the key one: better instructional quality and career prospects, for a cheaper price, isn’t what the market is actually demanding when it comes to higher education.

That sounds really hard. Not only do you need a lot of money, but you need a lot of high status people willing to risk lowering their status to sign off on it. What companies wants to be known for “devaluing” education? Thiel has tried to pay people not go to college, but I don’t think that can scale.

Scott: “Why did so many people die in the maiden voyage of the Titanic?”
Normal person: “That’s a famous thing actually. The ship hit an iceberg and sank”
Expert 1: The waterproof compartments were not designed for the level of damage the iceberg caused
Expert 2: The crew was not careful enough to avoid icebergs given how far North they were and the time of year
Expert 3: When the ship started sinking, people didn’t realize right away and screwed around. It took a while to even start evacuating
Expert 4: Lifeboats were not used efficiently. Early lifeboats were underfilled and later lifeboats were overfilled
Expert 5: There weren’t enough lifeboats for all the people
Expert 6: Radio frequency wasn’t yet standardized, so the nearest ship never heard the distress signal

Scott: Wow, some really convincing theories there. It’s a shame the experts are all giving different theories and can’t agree on what happened!

TRUE STORY: The government did a whole bunch of different unrelated bad things and this caused a whole bunch of separate bad things to happen, which is why cost increased only in some industries and by different amounts and at different rates. A single-cause theory is never going to explain the situation well because there are multiple causes at play

Since this is a new Cost Disease thread, I figure I’ll respond to a comment on the old thread that I didn’t notice. Mea culpa.

I mentioned Jim’s theory on the rise of costs being due to the increasing number of “consultants” / “trainings” / bribes required to get anything done. Rather than one “Don” who needs to be paid, one has to placate a few dozen government and NGO bureaucrats in ways which look suspiciously like kickbacks. Everyone with veto power takes a piece of the action and it ends up costing more in the aggregate then just handing over a cash envelope would.

(Couldn’t find the original place I saw it, so here’s a similar link. Ctrl-F “no men” if you have a Jim allergy)

Someone who can shut you down under rules which are so voluminous and burdensome that it is virtually impossible to comply with them, effectively has the power to inflict harsh punishments at whim. This power was called Fǎ by the Chinese Legalists: it was, in their estimation, the most important tool for an emperor to maintain control. If they use this power to suggest that maybe you should pay some of their old buddies if you want to pass your next inspection… what do you call that except corruption? It’s legal, Legalistic in fact, but it’s not any less graft for its legality.

If they use this power to suggest that maybe you should pay some of their old buddies if you want to pass your next inspection… what do you call that except corruption?

That is exactly the definition I gave for corruption, because it doesn’t fit your examples! Except for hiring the ex-FDNY consultant, all your other examples were just using NIH-approved vendors. (or is it FDNY-approved vendors? that would be more suspicious. But I see a lot more potential for corruption from the local inspector than the national inspector.)

Also, I repeat my claim that this is a fixed cost — there is a list of prices, and that this is missing Jim’s point.

If you own a restaurant in Little Sicily (scenic neighborhood of Stereotype, USA), you know that if you want to stay on the mob’s good side you have to buy all of your olive oil from Big Tony at a 50% markup. You also need to hire Little Tony, keep the kid busy until he becomes a made man. And when Regular-Size Tony shows up you give him the grand tour, and make damn sure that he likes what he sees.

How does any of this change when it’s the Office of Legitimate Businessmen telling you who to buy from at a 10x markup, what qualifications they expect your OLB-compliance personnel to have, or how you should react to one of their inspectors showing up? You’re buying overpriced crap from companies the regulators like because, if you don’t, you’ll risk getting shut down. You’re hiring people you don’t need to hire, providing cushy jobs for former regulators. And if the OLB inspector says jump you say “how high?” just as readily as you would to a mob knee-breaker.

I don’t think it’s missing the point, rather it is the point. We’ve traded a veneer of respectability for an orders of magnitude less efficient process. Reducing the number of hands that need to be greased is one part, the other is replacing Iron-Triangle style corruption with more honest payments.

1. Regulatory agencies are extremely unaccountable, to the point that I don’t really see how they have any advantage over the mob in this respect. To turn that theoretical accountability into actually being held to account requires winning a lawsuit or getting multiple congressmen / senators elected. Neither is a cheap or likely prospect.

In some vague sense, these agencies may be accountable to “the People” however we define that. But from the perspective of a private citizen or a corporation they aren’t.

2. What is the sandwich here exactly? The only one of these agencies which actually helps push research forward is the NIH, since it doles out grant money. The rest are active hindrances to it.

I’ll pay $100 to a regulator et al rather than $10 to a pure outlaw racket

It’s not an either/or. You pay the $100 to a regulator and the $10 to the mob, or you don’t get to run a business. And the regulators are more efficient than the mob at cooperating so that multiple regulators can “farm” the same territory.

And the regulators are more efficient than the mob at cooperating so that multiple regulators can “farm” the same territory.

Although it might be best to take a vacation while Big Tony and Big John settle the question of who exactly gets to collect from the territory you’re in. You may have both the EPA and OSHA collecting from you, but they probably won’t burn you out doing it, nor shoot each other on your doorstep.

Ha ha, no. EPA will be buying steel-core “certified cop-killer” ammo from ATF, and OSHA will be buying stuff from the GSA that will have turned out to be ammo rejected by the military for too many misfires. So EPA should have the edge at first until their barrels wear out.

I’m surprised Scott didn’t do more in his original post to flesh out the potential mechanisms by which “markets might just not work” in these domains, especially given his past, nuanced posts about positionalgoods and multipolar traps.

Education and housing are pretty obviously positional goods. The Two-Income Trap, which Scott has reviewed, gives a decent empirical account of this; Robert Frank’s work on “expenditure cascades” is more theoretically rigorous and includes experimental results showing that people conceive of these as positional. Meanwhile, healthcare is classically cited as an absolute, not positional, good — but I wouldn’t be surprised to find end-of-life care working more like a positional good, with the status benefits accruing to the patient’s family. (It seems more important to keep Grandma alive for an extra three weeks once everyone else is also doing it.) And as it would happen, a lot of the cost increases in healthcare are coming from end-of-life care (depending on which stats you use.)

Bidding wars on positional goods can be a multipolar trap, as agents trade away absolute goods (eg. leisure) to invest more in positional goods. And these dynamics are supercharged by the growth in inequality…

If the problem were just “rich people looking for places to throw their money away”, there would be other options for poor people who don’t want to do that, the same way rich people have fancy restaurants where they can throw their money away and poor people have McDonalds.

Right, the problem can’t just be inequality — but inequality can dramatically exacerbate other market failures causing cost disease. For example:

1. More disposable income provides more fuel to the bidding war for positional goods like education and housing. Again, see Robert Frank’s literature on “expediture cascades” for how these bidding wars can cascade down the income ladder.

2. Subtly different: a steeper income distribution actually increases the incentive to spend on positional goods like education and housing which people (rightly or wrongly) think will boost their (or their children’s) position in that distribution.

3. Healthcare’s notorious barriers to entry mean that increased demand at the top will bid up prices throughout the industry. Unlike in restaurants, where more demand for fancy restaurants doesn’t do much to McDonalds prices.

4. Healthcare isn’t as excludable as restaurant meals. You could try to create low-budget insurance that only covers x and not y, but if I desperately need procedure y and end up in the hospital, I’m probably going to get it no matter what my insurance covers, right? (Either I and my family will pay out of pocket and go into debt, or the hospital will just swallow the costs.) I’ll assume fc123 is right in their claim that a lot of the current expenditure in healthcare goes to treating conditions that would have been untreatable decades ago. This means that as the richest folks can afford better and better healthcare (pushing the frontier of what is “treatable”), the cost of treating everyone else goes up too.

Granted, none of this explains why doctors and hospitals aren’t sitting on piles of cash right now — it does look like administrative bloat is real and costly. I’d note that other industrialized countries tend to have much lower overhead despite higher levels of government intervention in the medical industry, so government probably isn’t the whole story here. I think the Hicks quote might be an important part of the answer…

That seems like a bad test of whether housing is a positional good. A good test might involve running the experiment that Robert Frank discusses at the bottom of p. 1 here. Unfortunately, I can’t tell if he’s actually seen a rigorous experiment or is just reporting the results of an informal poll.

In any case, this working paper discusses lots of evidence that housing investment has increased over time without any increase in housing-derived utility.

The first choice is between world A, in which you will live in a 4000-square-foot house and others will live in 6000-squarefoot houses; and world B, in which you will live in a 3000-square-foot house, others in 2000-square-foot houses. . .

If only absolute consumption mattered, A would be clearly better. Yet most people say they would pick B, where their absolute house size is smaller but their relative house size is larger.

You can come up with plausible, and I would argue more realistic, reasons without relying on positional goods as an explanation. Housing, as LCL alludes to below, is about far more than square footage. The person that buys the smallest house on the block (or more accurately the cheapest) is the person who can’t afford better. They are automatically compromising in this scenario, if they could afford the 6k sq foot house they would buy it (by Frank’s logic) and get both the neighborhood and the house that they want.

The opposite is going to also feel true, the person that owns the biggest house on the block could arguable afford more. He hasn’t compromised his choices, he bought the neighborhood he wanted and the house he wanted. What else can he afford? The car he wants? The time off he wants? Early retirement?

Positional good isn’t the same thing as conspicuous consumption. In the case of U.S. housing, the key factor is reportedly school districts. Getting your kid into the best school is desirable, and by definition not everyone can do it. So the cost of doing it depends on the number of people trying to do the same and their willingness to pay for housing in that district.

Positional good isn’t the same thing as conspicuous consumption. In the case of U.S. housing, the key factor is reportedly school districts.

If this is the case then it is not a positional good, it is a normal consumption good with the consumption being the education. A positional good is something where you are willing to take a lower quality good as long as everyone else gets something even lower than that. People who pay for a school district are trying to buy consumption directly.

Getting your kid into the best school is desirable, and by definition not everyone can do it. So the cost of doing it depends on the number of people trying to do the same and their willingness to pay for housing in that district.

“School district” has very little to do with education. It’s a well known euphemism, to the point that realtors aren’t supposed to mention school quality or crime statistics.

People, of any color, don’t like living in dangerous filthy neighborhoods. This goes double for those hoping to build families.

So people with the money to do so will attempt to buy their way into safe clean neighborhoods. And as those become scarcer, bid up the prices to ridiculous heights. Being in debt sucks but it sucks a lot less than your daughter skipping school with her drug-dealer “boyfriend.”

Might be true in some areas, but my area (Northern NJ), talk about school district has everything to do with education. The bad places you mention are well known and correlate well with what are called “Abbott districts” (the poorest/worst school districts). But everyone knows they are bad and the usual thing talked about with respect to them is “safety”. (And the occasional person who complains that “safety” is just a euphemism for “no black people”, and the even more occasional person who tries to prove them right.)

But talk about school quality is generally about people who either think their kids are the biggest geniuses ever and need to be in a “prestige” district (these are also well-known) with high Ivy League attendance and special arts or engineering or science programs, or it’s people trying to make fine distinctions between the middling districts. For instance, there’s basically no visible or crime-rate difference between neighboring Maplewood and Millburn, NJ, but Millburn is a “prestige” district and Maplewood is not, so basically the same house will cost you a lot more in Millburn.

Though there does seem to be a positional component. Government schemes like Affirmatively Furthering Fair Housing which relocate the inner city housing projects to the suburbs greatly reduce the safety and attractiveness of those neighborhoods to current residents. It wouldn’t be a surprise if housing prices went up as a result of increases in housing vouchers, as people scramble to maintain their quality of life in the aftermath.

A question for the anonymous hedge fund manager: I work at a fund of hedge funds and spend a significant amount of my time looking at (relatively) small hedge funds and I’m curious as to extent of institutionally you intend. My shop and I know many shops bigger than mine don’t necessarily shy away from second tier prime brokers or administrators – some of my favorite funds use Wells and Jefferies and BTIG and Cowen and KPMG and NAV. I typically don’t handle operational due diligence, but I’ve never heard of anyone passing on a fund because an administrator or auditor simply wasn’t the best of the best. Maybe at pensions there is a best practices arms race, but it’s never been apparent to me. I would be interested hear more of your thoughts on this.

Regarding McArdle’s contention that the US is unusually bad at regulating and as per my recent harping upon the value of nation-state smallness, I’d be interested in seeing a comparison between regulatory efficiency of small and large population nations. The US may be very inefficient in how it regulates, but how does it do in comparison to e. g. BRICS? My impression is pretty darn well (though India’s relatively market-driven medical care is apparently quite cheap and good, the bureaucratic regulatory hurdles there in general are supposed to be Sisyphean from what I’ve read.

Arguably the connection to bigness, besides the inherent challenges of regulating more people, is that the bigger the federation, the more administrative layers are required/creep in, each new layer introducing a bit more inefficiency in a way which multiplies the ultimate challenge of compliance.

Kudos to the answers from Noah Smith and Scott Sumner for making use of the fact that different governments exist, and one can learn from that about what works and doesn’t (which is of course not easy when one has to take into account different contexts). Find it frustrating when people refuse to look around, and insist on re-inventing the wheel.

Let me propose a heretical thought. Consider the Oroville Dam: maybe Governor Brown’s dad Pat should have spent more money on it back in 1959, rather than just build an “Auxiliary Spillway” that’s kind of like an “Auxiliary Fire Escape” in a skyscraper that turns out to be, when you actually need it Right Now, to be just a giant ball of twine.

Heretical? This is about the most conventional thought ever. The heretical thought is that we should spend that much more money on every project with safety implications because spending only that money needed to prevent failures requires a time machine.

The heretical thought is that we should spend that much more money on every project with safety implications because spending only that money needed to prevent failures requires a time machine.

And it’s heretical because it’s not a very good idea. You can’t reduce risk to zero. You can always spend more money to reduce risk by epsilon. So on just about every project you’ll reach the point where the total cost exceeds the total benefit, and you won’t build anything.

One can always dismiss further action by making references to the tail. The relevant issue at present goes: Take every situation in California that poses roughly the risk, as far as we can currently calculate, as the spillway was thought to have posed two years ago. Should we fix all that stuff? Spend a bunch on trying to make better estimates? Who’s for raising taxes enough to do the work?

“Who’s for having spent more in the past on the thing that’s failing now?” is not a useful question.

It seems more than likely that “you can’t reduce risk to zero” was used as a reason not to pave the backup spillway any number of times.

If every time there is a failure, you determine that there should have been some action taken in the past to reduce the risk of that failure, and that therefore from now on you will reduce the risk to below whatever the risk was at the failed project, you have committed to the entire tail. Every failure ratchets your risk tolerance down.

I agree, and even think that that’s probably the normal case in similar circumstances. But I also think it’s naive to think that budgets are often cut with fingers crossed, and it’s not clear to me which category this falls into.

The Ghost Ship Monday-morning quarterbacking, on the other hand, is clearly silly. The budgets to deal with all such places would never have been there, no one would want them to be, and the interference in shutting down every shady living space would have been seen as terribly oppressive.

So in dam building and maintenance in 2017 we now possess a longer list of ways that dams can fail and of steps that can be taken to lower the risks than we possessed on, say, the day before the Teton Dam in Idaho collapsed in 1976.

So this increased knowledge of what we ought to try to fend off gets incorporated into our knowlege base and thus into our cost base.

For example, the rule of thumb that dams should have two operational spillways rather than one turns out to have been a good idea.

In 1983, the colossal Glen Canyon dam above the Grand Canyon, with a reservoir eight times the capacity of the giant Oroville reservoir, was nearly destroyed by flooding when it was discovered that the two spillways were being wrecked by cavitation caused by heavy outflow. It was decided to sacrifice the left hand spillway by using it to drain Lake Powell, while keeping the right hand spillway reserved in event of future flooding.

The effect of cavitation on concrete is weird and very counter-intuitive. Surely enough incidents like this have happened for civil engineers to largely be aware of the need for taking steps to protect against it, but I wonder if the reason more repairs and upgrades aren’t getting done is that higher level decision makers still find it hard to imagine that their massive concrete structures could be damaged so badly so quickly by just having water flow over them.

It may be that the Benefit/Cost Ratio just doesn’t pencil out. I can construct reasonable guesses of values for the Oroville emergency spillway that come out to a BCR of not much more than one. I want to say that these are all toy numbers, used for examples. The real ones will probably come out over months to years.

Now, your engineers are telling you that they can’t be sure if the spillway will undermine or not during flooding, but they guess that there’s a 50% chance of undermining the spillway during use. The next piece of the puzzle are the odds of using the spillway. Your hydrologists generally have a pretty good idea of what the odds of a major flood even are, and I’ll guess that they were intending them to only be necessary during an event with a 0.002 (0.2%) chance of occurrence annually. So the odds of having to use them in any given year are 0.001 (0.1%).

If the costs of a flood from losing the emergency spillway is $5 billion, then the annual benefit for fixing the emergency spillway is $5 million dollars. With a 50-year planning horizon, the benefit is obviously going to be higher. Generally, if you want the exact number they tend to use Monte Carlo simulation, but a good rule of thumb is to multiply the annual benefit by 23 to get the 50-year benefit. So the benefit is $115 million vs. a $120 million cost. So the BCR isn’t even one.

Right now, on the federal level, OPM doesn’t care to even hear about projects less than either 2.3 or 2.5 (it’s one of the two, but the exact number isn’t coming to me right now.)

Now, again, these numbers all came right out of my fourth point of contact. However, I don’t think these are unreasonable numbers, with one exception.

That exception is that I assumed the emergency spillway would be used for a simple high water event. What isn’t included here is use of the emergency spillway for less than the Spillway Design Flood, which is what happened here. Under the original planning, a 100 kcfs event shouldn’t have needed the emergency spillway, so the odds of using the emergency spillway should include the chances of failure on the main spillway.

Right, the risks of one water outlet failing tend to be correlated with the risks of other water outlets failing. For example, the 14k cfs flow through the Oroville powerstation has been out of service ever since the main spillway started breaking up.

A data-based intervention: for higher education, at least, it is important to realize that whatever ‘cost disease’ is at work in the US is also at work in Europe. According to the OECD, France had spending increases of 19% on higher education from 2000 to 2009, and 15% from 2005-2011. Meanwhile, according to the Delta Cost Project, the cost of tertiary education in the US went up roughly 15% for public universities and a bit more for private (this is based on eyeing the graphs) from 2003-2013. The difference is that the increase in France is part of your tax bill; in the US, the proportion of public revenues being used to finance public higher ed is continually shrinking even as costs go up. The result is that the tuition paid by students has leapt astronomically here: Center on Budget and Policy Priorities. People think the cost of university isn’t going up in Europe because they have no idea what it costs. I’ve worked in (elite public) universities in both France and the US, and I am at a total goddamn loss to explain what’s going on. The proximal causes are clearly administration, modest increases in the cost of instruction, and (in the US only) bells and whistles for student life, healthcare, and the proliferation of procedures to avoid lawsuits. But the ultimate cause? It is definitely not competition, because France has none and the US has plenty. It is not prestige, because in France the elite schools cost exactly as much as the non-elite ones. Any of the remaining factors are possible: rent-seeking by managerial employees, government subsidies, government regulation, pick your favorite. It’s also worth noting that, while students are bearing *some* of the increase in the US by way of tuition payments, the taxpayer is also bearing a significant portion of the cost: the Congressional Budget Office estimates that the federal government’s implicit subsidy for student loans is around $10 billion a year. So we’re like a super-inefficient France. Which I can say, having lived in France, is f*king stunning.

A quick addendum: I realize that a lot of people here don’t think that US higher education is competitive. I currently work at a second-or-third-tier public university, and I would add a bit of nuance to this. The landscape for colleges is incredibly competitive. It’s just competing about *really* stupid things, like who has a good football team, comfortable dormitories, and a nice rec center. There’s a good reason for this: evaluating a university’s food court is easy for a high-school senior and their parents; evaluating their Chemistry department is really hard.

Here’s a question that could be helpful: if you graph rising costs, is there an inflection point in the late 1960s when there was a massive cultural change?

Before about, say, 1968 a lot of huge projects were accomplished quickly and cheaply, in budget terms, by imposing a lot of externalities on marginal groups and/or the public and environment.

For example, if the Brooklyn Dodgers wanted to move to Los Angeles in 1958, the City Council would condemn the Chavez Ravine neighborhood, throw out the Mexicans who lived there, and let construction crews shove mountaintops into canyons and 4 years later the Dodgers had a magnificent baseball stadium.

From about 1969 onward it became much harder to get big things done because of a revolution in attitudes toward imposing externalities. For example, the homeowners of Beverly Hills had initially placidly put up with the inconveniences of the giant Beverly Hills Country Club golf course construction project when Dean Martin announced it in the late 1960s, but around 1969 they realized they could use the new environmentalist ideas to permanently put the kibosh on the half-finished project (especially because the Mob was skimming heavily from the budget):

For example, if the Brooklyn Dodgers wanted to move to Los Angeles in 1958, the City Council would condemn the Chavez Ravine neighborhood, throw out the Mexicans who lived there, and let construction crews shove mountaintops into canyons and 4 years later the Dodgers had a magnificent baseball stadium.

From about 1969 onward it became much harder to get big things done because of a revolution in attitudes toward imposing externalities.

David Frum’s How We Got Here: The 70s has an excellent chapter on this trend. As he tells it, between roughly the New Deal and the early 1970s, the trend was to allowing a few high-visibility Robert Moses types to make the tough calls and get stuff done. After that, growing trends of individualism and environmentalism made it much easier for anyone who didn’t like a project to throw sand in the gears.

Today, of course, the old Robert Moses method is still basically how it works in China, which is why they can build infrastructure affordably and we can’t.

Thanks. I really should read David’s book. I’ve heard so many good things about it over the years.

I like to follow golf course construction news out of China because you get stories like, “600 club-wielding peasants battled 200 ruffian bandits hired by a golf course developer to clear the farmers from their land.”

The referenced cost escalation is not a disease and it’s not an artifact of either a malfunctioning market or an empirical manufacturing-related consequence. It is simply the mechanism by which the enormous expansion of medical services (including R&D) and treatment facilities is being funded. This is being driven by two main forces. The first is associated with the aging of the baby-boom generation (and an associated decline of the mean health of all US population cohorts). The second is strategic positioning of the US economy to deliver premium medical services to a worldwide customer base. People everywhere on the planet will soon be exchanging a significant fraction of their labor for life-preserving remedies that will be preferentially obtainable at US-based facilities.

This is not a new phenomenon. A similar gambit has been used to fund the communications infrastructure explosion.

“The second is strategic positioning of the US economy to deliver premium medical services to a worldwide customer base. People everywhere on the planet will soon be exchanging a significant fraction of their labor for life-preserving remedies that will be preferentially obtainable at US-based facilities.”

Improved longevity in other countries is a distinctly low tech enterprise – health diet, exercise. other health promoting behaviors. In the USA you get access to that when you sign up with a managed care company pay them $160/month for a $6,000 high deductible plan because they advertised a free ($15/month value) health club membership and a 5 minute call each month to remind you to eat healthy. Medical imaging and various surgeries can be obtained for much less in foreign countries with physicians who are as qualified as American physicians. In fact, in America these days you might not see a physician because they are “too expensive”. Any miracle drugs invented by Big Pharma and preferentially subsidized by American consumers will also be cheaper in other countries, where the governments are aligned with the people rather than businesses.

The only facilities that people from other countries will flock to are the few outfits that are still managed by physicians. At least before the government and managed care companies dilute their quality like everyone else.

It is not wise health practices or routine low-tech medical treatments that will drive this market; but rather it will be driven by the desperately ill that require highly specialized interventions (either via high-tech medical procedures or leading-edge medications). For example, a myocardial infarction (serious heart attack) intervention will typically bill out at over $250K for one afternoon in the ER and two days in semi-private recovery room. Then you are out the door with the bill. These procedures are being more common than fender-bender auto accidents.

In addition, treatment for chronic diseases (such as diabetes) will create a long-term cash flow from these types of patients. And obesity-driven diabetes is now at a pandemic level.

There is always a problem looking at billing versus payment in a managed care system. There is no managed care company that pays $250,000 for three days in the hospital. If you are unfortunate enough to have no insurance most people with no resources don’t pay the bill. If you are more unfortunate to have resources many people file bankruptcy. All of the hype about the cost of high tech medicine never accurately described what is actually paid.

The only sector in healthcare that can successfully capture a large part of what they attempt to bill is the pharmaceutical industry and those physicians who refuse to accept insurance payments.

If you examine the details of how middle-class American life has changed since the 1950s or 1960s, the biggest, most obvious difference is the dramatic increase in risk aversion. Risks that were shrugged off in 1960 are seen as fearful hazards today.

(When I was a third grader, walking many blocks to elementary school was taken for granted; today, allowing a third grader to walk to school would be seen as child endangerment. Typical middle-class families spend lots of adult time, gasoline, and car mileage driving their kids to school and other places, a new form of overhead that didn’t exist before.)

A whole lot of what people call “fear of litigation” is really just naked risk aversion. It’s generally not that some lawyer has specifically advised the school district to shut down certain activities because of possible lawsuits. The people making these decisions are not lawyers and are not acting on legal advice, rather, they are terrified that something bad could happen. Maybe they imagine being personally blamed, disgraced, and fired, but to say that would sound self-serving. So they summon up scary visions of billion-dollar lawsuits.

A lot of administrative bloat is driven by these kinds of considerations: you can’t let thus-and-such a problem just take care of itself, rather, you need to hire a specialized person just to watch out! And if all the other school districts have such a person, you’re obviously running serious risks if your school district hasn’t jumped on the bandwagon.

(2) College life

All this same risk-aversion applies at the university level, too, but there is another consideration that has tremendously escalated costs: students are not treated like soldiers any more.

In 1950, student housing, even in the Ivy league, even in topnotch fraternities and sororities, was closely akin to military barracks, with little space or privacy. Attending college was seen as a somewhat ascetic experience. But by the 1970s, that model was widely rejected: students demanded greater freedom, privacy, leisure, and amenities. Part of this was the general humanitarian and pro-freedom sense that students had learned to apply to themselves. Another part was the abandonment of the ethic that underlay the unity and conformity previously expected of college students.

But at the same time, by 1980, state governments were sharply cutting back on higher education funding, causing increases in college costs. Meanwhile, financial aid lagged behind. With little fanfare, students from working-class families largely disappeared even from state universities.

Now, students at four-year institutions are drawn almost exclusively from upper-middle-class backgrounds. Colleges now compete for students by offering greater and more costly amenities. The college experience is designed to interface smoothly with the affluent, privileged lifestyle they grew up with.

In 1950, student housing, even in the Ivy league, even in topnotch fraternities and sororities, was closely akin to military barracks, with little space or privacy. Attending college was seen as a somewhat ascetic experience. But by the 1970s, that model was widely rejected:

I can’t speak to the 1950’s, but I graduated from Harvard in 1965. As best I recall, we had at least as many square feet per student as my son had at Chicago a few years ago, although it’s true that the dining service was considerable less luxurious than his.

One approach I haven’t seen mentioned here much is to look at these sectors by comparing similarly situated things which turn out to have very different costs.

So for health care, what’s the difference for Lasik vs cosmetic procedures vs the rest?

For education, what’s the difference between BYU-Idaho ($4k), BYU-Provo ($10K) and UofU ($25K/year)? Between a private elementary with similar results as a district school and a charter school?

For housing, what’s the difference between NYC/SF and Phoenix/Houston?

For infrastructure, what’s the difference between a tunnel LA digs vs. one a private entrepreneur digs in LA?

It seems easier to tease out the reasons behind those cost differences than to try and look at the picture at the 10,000 foot level with tons of conflating variables people can argue over.

So for example, a private school typically rents a building or purchases with an endowment. A charter school either leases or purchases with tax-exempt bonds (or a combination of both). A district issues bonds and collects property taxes to pay for them. You can track the costs of the three approaches and the price of an elementary school’s building cost (I’ve designed and purchased one as a School Board Chair, so I’m more familiar than most) meeting the same legal safety standards is very different for those three listed situations, even in the same community.

I have my opinions on the empirical comparisons I listed at the top of this comment, but because they are empirical questions, it’s much easier for others to either confirm or deny them and experiment based on the results.

These days, colleges are extremely stratified by SAT score, but BYU isn’t like that. The last time I checked (about five years ago), it’s 25th and 75th percentiles of SAT scores were farther apart than just about any other prominent college in the country, meaning that a wide range of kids go there: both the smart Mormon kids and the average Mormon kids. The students at BYU just don’t really care all that much about going to the school with the highest USNWR ranking. …

But at BYU, it’s pretty easy to get in. Non-Mormons don’t want to go there, so it’s not that competitive. And yet it’s not a “safety school” — most of the kids who get accepted choose to go there. It’s yield is up there with Annapolis and Columbia and the like.

And the tuition is cheap. There’s no real magic — they have big class sizes. They just don’t see the need to compete in the USNWR rankings by having smaller classes.

Is it possible to partially explain the appearance of increasing inefficiency in some sectors as an illusion caused by massive increases in efficiency in the production of consumer goods?

Since we declare by fiat that the cost of the CPI basket stays constant in real terms, a significant increase in the efficiency of producing the CPI would translate into apparently rising real costs everywhere that hasn’t seen such substantial increases in efficiency.

Take education: it is reasonable to think that education won’t get cheaper over time in the same way that producing a laptop or a loaf of bread or a car will. So if these latter things get easier to make and we measure inflation relative to these latter things then we are bound to think that education is getting more inefficient.

I like this (partial) explanation. If high volume manufacturing of consumer goods gets much cheaper, then that drags down the inflation rate, making everything else more expensive. I guess this amounts to shifting money away from consumer goods into other fields.

I think any explanation that starts with “well, we have so much money now that we have to spend it on something…” ignores that many people do not have so much money, and in fact are really poor, but they get the same education and health care as the rest of us. If the problem were just “rich people looking for places to throw their money away”, there would be other options for poor people who don’t want to do that, the same way rich people have fancy restaurants where they can throw their money away and poor people have McDonalds.

I’m pretty sure that, if the government subsidized fancy restaurants (and made McDonald’s illegal), poor people would no longer have McDonald’s.

This analogy seems to me a terrible way to describe the way poor people make education and health care decisions. Poor people “having McDonald’s” is valuable because poor people actually spend their own money on food, and McDonald’s costs less than fancy restaurants. Poor people “get the same education and health care as [rich people]” because rich people give it to them.

I don’t see why “we have so much money now” needs to mean that every individual has more money. “We” collectively “have so much money now that we have to spend it on something” seems perfectly valid. “Rich people looking for places to throw their money away” are spending it on increasing the number of poor people who learn to do crappy algebra and stay in the hospital with cold symptoms.

On the subject of the high costs of infrastructure, it’s topical that Elon Musk is attempting to get in the boring industry. This Bloomberg article notes that Musk wants to help relieve traffic congestion by digging down: Musk says he hopes to build a much faster tunneling machine and use it to dig thousands of miles, eventually creating a vast underground network that includes as many as 30 levels of tunnels for cars and high-speed trains such as the Hyperloop.

His goal seems to be to get 20x improvement to the speed of tunneling: As we walk through the machine, Musk and Davis pepper the tunnel’s project manager, Shane Yanagisawa, with questions. They ask about grouting materials and staffing, but mostly about speed. Yanagisawa says the limiting factor is muck. Nannie’s conveyor belts can carry only so much dirt at a time. The fastest he thinks the machine can possibly run is 75 millimeters per minute. In a typical week, it moves through 300 feet of clay.

Musk nods. “We’re trying to dramatically increase the tunneling speed,” he says. “We want to know what it would take to get to a mile a week? Could it be possible?”

The current plan for an L.A. subway line is about a billion dollars a mile, which Musk thinks is crazy and therefore a place ripe for efficiency/cost improvements.

I wonder if takes a visionary outsider to try to get dramatic improvements in industry. Why wouldn’t current boring companies try to get dramatic improvements? Once a company is established, do they tend to focus on incremental improvements? Or is Musk making a bet that might completely fail because he doesn’t know what he doesn’t know?

It’s interesting to me that his entry to the infrastructure market seems to follow a similar pattern for Musk, of finding an industry to make vast improvements, but also an industry which government heavily subsidizes: ‘green’ cars, solar panels, rocket ships, and now building transportation infrastructure.

The last time we did this exercise he rolled out the Hyperloop as a much cheaper and faster way of travelling between Los Angeles and San Francisco. If you read about the companies pursuing the idea now, they’ve completely abandoned that route as not economical for all the usual regulatory/property/existing infrastructure reasons.

My boring expertise are largely textual, but I’ll venture some envelope calculations. A mile is 1609 meters, so 1/7 mile is 230. Seems like 4.5 meters diameter would be a smallish tunnel. So that’s an area of 64 square meters for a total of 14720 cubic meters of material per day. Say 12 cubic meters per dump truck load. Therefore, assuming technology to get all that material to the head of the tunnel, that’s about 1230 loads per day or 51 an hour assuming a 24 hour day. So kind of a Berlin airlift of dirt. “Airlifts” are expensive and disruptive. So maybe you’ve only managed to shift the costs and greatly increase the disruption.

Or maybe he’s thinking that whatever gets the material to the back of the tunnel would be extended to wherever the dirt is supposed to wind up. Through a city. And then a lot of not-city.

And all this is assuming that the bulk of the construction costs is in the tunneling itself, and not the surveying and re-routing of conflicting infrastructure.

Can you provide a link on the companies that have dropped off Hyperloop and their reasons for doing so? Are any companies still pursuing it?

they’ve completely abandoned that route as not economical for all the usual regulatory/property/existing infrastructure reasons.

That’s one reason why Musk’s boring project is kind of interesting to me. How do property rights extend below ground? If most people don’t have claims more than 50 feet below their property, perhaps regulatorily it’s easier/cheaper to dig there.

So kind of a Berlin airlift of dirt. “Airlifts” are expensive and disruptive. So maybe you’ve only managed to shift the costs and greatly increase the disruption.

The concern you have seems to be there is a lot of debris to remove. So, what if he sets up operations on a farm or low-density suburb where he can build hills of earth that have been removed from the tunnels using large conveyor belts?

Or maybe he’s thinking that whatever gets the material to the back of the tunnel would be extended to wherever the dirt is supposed to wind up. Through a city. And then a lot of not-city.

It depends on what the economics dictate. Which way is cheaper, and do the costs outweigh the benefits?

And all this is assuming that the bulk of the construction costs is in the tunneling itself, and not the surveying and re-routing of conflicting infrastructure.

What infrastructure do you think needs to get rerouted? The article notes that below 50 feet you’re digging under gas and sewer lines, so there’s not much you need to worry about running into other than boulders (which do seem like a challenge): “The plan is to expand the current hole into a ramp designed for a large tunnel boring machine and then start digging horizontally once the machine is 50 feet or so below ground, which would make it low enough to clear gas and sewer lines and to be undetectable at the surface. The company, such as it is, is working on securing permits and hopes to have them by the time the tunnel hits the property line.”

an you provide a link on the companies that have dropped off Hyperloop and their reasons for doing so? Are any companies still pursuing it?

Search for “One cost proved too high”. I’m not sure how many other companies are serious (to the extent that these are). The startup world is perpetually filled with B.S. It’s part of the deal.

The concern you have seems to be there is a lot of debris to remove. So, what if he sets up operations on a farm or low-density suburb where he can build hills of earth that have been removed from the tunnels using large conveyor belts?

You can build high-speed rail pretty cheap across a salt flat, too. The whole point of going underground (when you’re not, for example, going under a mountain) is to address congestion that results from density.

What infrastructure do you think needs to get rerouted? The article notes that below 50 feet you’re digging under gas and sewer lines, so there’s not much you need to worry about running into other than boulders (which do seem like a challenge):

50 feet isn’t that low in a city. Unless tall structures are built on bedrock (which is explicitly not a premise of this case) they’re built on pilings driven far into the ground. For an example, watch this video of the Bertha route and keep an eye on the crown depth. The model is based on (presumably quite expensive) advance research and surveying.

For now, everyone trying to commercialize the Hyperloop seems to be a scam artist. There’s interesting research projects and competition. But Elon “open sourced” this idea, turning it over to the public to implement, and as an outsider it seems that only shysters have picked it up.

So kind of a Berlin airlift of dirt. “Airlifts” are expensive and disruptive.

One alternative is to start by digging a 100,000 cubic meter hole at the starting end of the tunnel—relatively slowly, trucking the dirt out at a brisk but non-airlift pace. Then when you go to dig your mile-long tunnel, you just dump the bored material in the hole.

You’d need about 100 by 100 meters (a large city block; 2.5 acres) free if you want to dig 10 meters down, or 50 by 50 meters (less than an acre) if you can dig 40 meters down.

In terms of getting rid of a constant stream of material, though, a purpose-built railroad might be much more economical. (You can combine the railroad with the pre-dug hole.)

These are all ideas, but the premise of the tunnel is that it’s in the middle of a (presumably functioning) city. The relevant question is whether the additional costs of such solutions (over hauling the material over streets in dump trucks at the current rates) would balloon the costs of such projects, thereby making much faster still imply much more expensive.

Musk seems to be assuming that people have just been dumb in not exploring a much faster way of getting the material from one end of the tunnel to another. There are probably efficiencies to be gained from such improvements, for the projects that can absorb the higher rate of material at the opening. But the area may not have been explored much because that part of the chain isn’t generally the bottleneck in the overall process. (Absent mistakes, after all, digging time isn’t even currently the bulk of project time. There are typically years on the planning side that Musk’s idea has no impact on.)

I’d tend to lean towards “doesn’t know what he doesn’t know,” but the first time I heard of Elon Musk was when he proposed the Hyperloop and I was deeply unimpressed by the conceptual understanding there. The proposal as written was to save on land acquisition costs in the middle of nowhere by putting the thing on a bridge down the middle of Interstate highway alignments. This gets transportation infrastructure costs exactly backwards, because buying (or condemning) farm fields outside of major cities is a pretty trivial cost, while building bridges is often one of the most expensive portions that you spend a significant amount of time avoiding through careful alignment choice.

OTOH, the guy is pretty smart and rich, so maybe he’s onto something. As long as he’s spending his own money or that of private investors I’d be happy to see him try. Hell, I’ve got a lot of projects I’d like to see come down in price by half. I don’t think he’ll do it, but Godspeed if he wants to give it a shot.

This gets transportation infrastructure costs exactly backwards, because buying (or condemning) farm fields outside of major cities is a pretty trivial cost, while building bridges is often one of the most expensive portions that you spend a significant amount of time avoiding through careful alignment choice.

I don’t know much about the expenses of bridges, but to the extent tunneling underneath farms and other roads is relatively cheap, then the Boring company becomes synergistic with the Hyperloop. Similar to the way that the Tesla’s Gigafactory battery manufacturing is synergistic to Solar Cities solar roof panels (where excess solar energy can get stored in large house batteries), and Tesla’s electric cars (where the house batteries can power the car).

Is solar power synergistic with batteries? The numbers don’t make any sense. Batteries are just too expensive. Even if electricity were free, it doesn’t make sense to store electricity in your house. A battery costs more than the retail price of the total amount of energy you can cycle through it in its entire lifetime. Tesla has brought the price of batteries down a lot, but it is still that expensive. Even at their projected future price reductions, it takes a long time to make sense.

I’m not talking about any fancy energy equations. I’m just talking about the price of electricity: $/kWh, which you can find on your electric bill, and the price and lifetime of the batteries, which you can look up on Tesla’s website.

Why does anyone buy them? Well, does anyone buy them? Most of the current capacity goes to the cars. There are some uses for power companies that might make sense, but don’t have a lot to do with solar. I don’t think SolarCity gets ahold of many. Solar plus batteries is pretty good for going off-grid, although that is a pretty small niche. In the very smallest applications it is competitive with generators. It is also simpler than generators, which may be valuable to individuals, even if it is more expensive. I think a lot of Tesla batteries were sold to companies that went off grid so that they could brag about how green they were.

Do you think the Gigafactory is making a bet that won’t pay off? Or will only pay off if they’re used for auto and not home batteries?

I’ve seen arguments before that it’s really hard to store large amounts of energy in a cost effective manner, so what you say wouldn’t surprise me. But it also seems to me like the Gigafactory was designed in part to create an ecosystem between solar panels, home batteries, and Tesla cars, and it would be interesting to me if there’s no way to make that economic.

My guess is that homes batteries are a rich person’s purchase at first, like with other early technology, and that improvements can be made down the road to make batteries more affordable. Or, perhaps the economics can’t work no matter what, based on some physics principles of battery capacity/usage limitations.

A battery costs more than the retail price of the total amount of energy you can cycle through it in its entire lifetime.

That’s not necessarily true for deep-cycle lead-acid batteries, depending on where you buy your electricity. But generally, yes, this doesn’t make economic sense strictly on a price per kW/h basis.

The market for these systems is mostly for people who place a virtuous premium on not having to ever do business with The Electric Company and its icky polluting fossil-fuel power plants which probably won’t work come the apocalypse anyway. Also, w/re Tesla, the prestige of having a Certified Green Powerwall prominently displayed in your living room, where the more cost-effective lead-acid batteries would be in a dingy shed out back.

If you believe the apocalypse is nigh, or that you have some Kantian imperative to zero out your personal carbon footprint, and don’t want all the lights to go off at sunset, this might make sense. And if your associates will think highly of you for making the visible effort, then yes, money can sometimes buy friendship.

A battery costs more than the retail price of the total amount of energy you can cycle through it in its entire lifetime.

I don’t think this is quite right. It’s not necessarily a slam dunk, but the batteries are already economical, given some favourable assumptions. Some numbers:

This gives the cost per warranty covered kWh at ~US$0.17. This:

gives the average cost per kWh in LA at US$0.184 per kWh, and the US average significantly lower at US$0.134 per kWh. On average prices, the powerwall is just economical in LA based on getting free energy (e.g. from solar).

Some people however are on time of use billing. I’m not sure what the electricity market is like specifically in the US, or in LA, but in Australia peak times can incur costs more than double what the average price is. With double the average price, the US more generally suddenly finds the powerwall economical.

All of this is based on the current situation. In the future, as there is likely a greater move to TOU billing, cheaper batteries and other factors, the battery option could become quite attractive for a wider audience. My analysis doesn’t take into account the cost of financing/the time cost of money, but I think it gives a bit of an idea of the scales.

No, boring under farms and other roads will never be relatively cheap compared to surface construction. The only reason to bore underground is to avoid other infrastructure and avoid purchasing expensive land. If you’re in farmland, that will *never* pencil out. Even relatively productive farmland is still pretty cheap. A quick Google search turns up an average cost of $3,000 per acre for farm, where a city may have that much per square foot. You can condemn an easement across a farm field, and as long as you provide crossovers periodically, the farmer can still use the land on the other side (crossovers would be pretty cheap on the hyperloop, given the small size).

If whatever Musk does to reduce construction costs actually works, it’ll very likely work just as well on surface construction, and keep the relative costs of underground and surface construction the same.

Whatever he does will have to work for the Hyperloop to work, since the costs in the proposal were so cheap as to be fucking bonkers.

Buying an acre-wide strip of farmland 600 miles long works out to something like 91 million dollars at $6000/acre (twice your value). That’s a decent chunk of change, but it’s petty cash compared to the numbers being floated for either the Hyperloop or the more conventional high-speed rail project that’s currently thrashing around.

I’m not an infrastructure engineer, but it seems to me that something else must be driving these costs then.

I was imagining a scenario where you cut farmland into acre parcels and buy all the ones intersecting the line where you want to build your railway. The results of that are going to vary depending on parcel shape, but they should average about what you’d get with square parcels. Could probably have been clearer about that.

“National Center for Policy Analysis: Should All Medicine Work Like Cosmetic Surgery? Because plastic surgery isn’t a life-or-death need, it’s not covered by insurance. Costs in the sector have risen 30% since 1992, compared to 118% for other types of health care. Does this mean that being sheltered from the insurance system has sheltered it from cost disease?”

That might be one aspect but is the plastic surgeon likely to get sued for repercussions for not treating some completely unrelated ailment that existed at the time he gave the woman breast augmentation? These seem to me an apples and oranges comparison of defensive medical practice.

Of course, that’s before addressing the virtual monopoly insurance companies have over healthcare in the states. The problem is multi-causal, as you allude. If you ever want to start your own private practice you’ll see this in action (or so I’m told, from a pathologist friend who wanted to start his own practice). Essentially the only way he has been able to establish a private practice was to go in with a group that had already paid 63 million dollars and spent two years in court for the right to compete and set up a practice.** Needless to say, the average doctor does not have that luxury or that much money. Apparently the problem is only going to get bigger since the insurance companies have their sights primarily on controlling the general practitioners (the ones who make the referrals, wink wink).

My husband is in a relatively high-level leadership position in the military.
Examples of inefficiency (government coupled with ostensibly “free market enterprise”) abound there. Just a small example, the clubs all went privatized in the interest of saving money a long while back. Now with the contract commitments (with private industry) a keg of beer costs 300 dollars whereas the same one down town would cost 90 (but there’s no option to buy).

**thinking further, I should probably explain this more. According to him (and a few folks here might know more than I, this is second hand), when a physician attempts to set up a practice in an area a census is required to see if the community can sustain it. After the census is taken, if it is determined the clinic/practice is needed the insurance companies swoop in and set up theirs.

What you say about your husband rings true to me. You get locked into these things where they’re supposed to save money and be more efficient and emulate the private sector, yet they end up costing more money.

A private company sees a government contracts as a big, fat, money cow to milk as hard as it can. The private company is only doing what it’s supposed to do, generate profits for the shareholders. But they’re not interested in saving money for the taxpayers.

If you could have the independence to go down the town and buy what you needed from Joe’s Paper’n’Printer Ink Cartridge Warehouse, you’d save money – even better if you could do it online and find the sale bargains that way. But because you have to buy from the Officially Approved Suppliers and their Official List and ship every damn thing from Dublin, you’re stuck with the Officially Agreed Price (that the company has calculated will make them a profit), a two-day wait, and no chance to take advantage of “Today only! Buy sixty reams, get thirty free – YES WE SAID ANOTHER THIRTY! WE’RE CRAZY, US!” bargains because why would the company need to compete on price, it’s already got the government locked into an agreed pricing structure for five years?

It’s a common disease of large organizations to assume that all of their employees are crooks and/or idiots, and need to be hemmed in by rules at every turn rather than being allowed to use their judgment and discretion. Often, this is a result of one actual crook screwing things up in the past, and someone higher up reacting to the embarrassing publicity by deciding Something Must Be Done to prevent this from ever happening again. Of course, the result is inevitably lost productivity that far outweighs whatever the petty corruption would have cost in the first place.

Just a small example, the clubs all went privatized in the interest of saving money a long while back.

Is it solely about saving money, or does this sort of scenario also guarantee supply versus the market (with penalties for failure-to-supply)?

This seems like a relevant thread to post my own questions on the medical issue:

“National Center for Policy Analysis: Should All Medicine Work Like Cosmetic Surgery? Because plastic surgery isn’t a life-or-death need, it’s not covered by insurance. Costs in the sector have risen 30% since 1992, compared to 118% for other types of health care. Does this mean that being sheltered from the insurance system has sheltered it from cost disease?”

Three thoughts:
1) Was the pricing initially very high for cosmetic surgery such that it is now coming in line with other medical costs? (e.g. the price of a Tesla)
2) Unlike almost all other forms of “health care”, cosmetic surgery *is* almost purely elective. This allows for a demand-side economic pull and consequent profits through volume.
3) How does the cosmetic surgery malpractice insurance costs track compared to other types of health care during this time period?

Looks like malpractice insurance is pretty high for cosmetic surgeons. I’d say the difference there (if we’re looking at overall cost) is more comparable to private schools versus public. The general surgeon is going to have higher-level risk patients with lots of comorbidities (they are there for health reasons, after all, not just to look pretty). IOW, an “expensive” patient. Often a very very expensive patient. The hospital stay will be longer. A plastic surgeon just rejects those types of patients at the get-go.

Per the club and “guaranteed supply” that’s an interesting question and kind of complicated to answer. The first step years back was to require everyone sign up for a credit card to in order to join the club. That’s when we bailed…at first.
Later on, we were “encouraged” to join. Commanders are generally required to join. At one time the spouse’s club was tied to the officer’s club (and therefore and extra credit card charge too). But that alone wouldn’t keep the supply up since there aren’t enough people (indirectly) obligated to join.
I’ll add another anecdote regarding military medicine and the private industry. At one time there were hospitals on just about every large installation. That changed when the DOD decided to downsize in order to “save money”…so the surrounding communities took on a good portion of the military installation’s patient base. Now, this was a pretty expensive endeavor because most military communities (remote locations, small towns, and so forth) cannot sustain that supply. The DOD wrote some very very large checks to those local hospitals to fund their expansion. One local hospital where I was employed (as an RN) in New Mexico received about 50 million dollars and the administration proceeded to use that money to renovate the hospital rather than expand it. The result was actually fewer beds…but rooms were all private. Then the hospital was sued for the faulty actions of a surgeon (who no longer worked at the facility). They had to declare bankruptcy, and there was a hiring freeze. That’s how that one worked out.

I’ll add my husband worked for DARPA for a short time and I’d say that is one good example of efficiency in government. But the organization is small, and the regulations are different from the DOD at large.

Just thinking further, we did have a homeless patient at that hospital we couldn’t discharge. At the time I left she had been there over a month. The patient needed an oxygen tank, and there was no oxygen available at the homeless shelter (or O2 hookups, or something….wasn’t my purview). This alone cost that hospital a great deal, over a thousand dollars a day if memory serves (the hospital pockets the cost and sends it on to other consumers).

Just about every law starts with good intentions. Something awful happens, and the public screams, “What?! There outta be a law!” Then it takes on a life of its own.

The anatomy of exactly how this can happen became clear to me back in the early 90s. I lived in Texas, and there was a law (constructed and promoted by completely well intentioned individuals I’m sure) that any dog that was on record for attacking a human would be quarantined for 10 days at the owner’s expense, and placed on a vicious attack dog list and terminated if there was ever a second attack. Seems reasonable, eh?
Here is how I became acquainted with that law…
My dog was accustomed to going out very early in the morning, but I liked to sleep in weekends when I was off work. One morning, my head was on the side of the bed and he tried to wake me with his paw. As luck would have it, I opened my eye at exactly the moment his (large, he was a 100 pound dog) paw tapped my face, and his nail grazed my eye. I went to the ER because I was sure my cornea was scraped. When I got there and explained what happened there was a lot of stalling and they made me fill in a bunch of paperwork…”Gee…can you look at my eye please?” They didn’t seem concerned about the eye at all. Very serious legal matters at hand, apparently. But I was very young and naive. Eventually they did look at the eye and I got a call from Animal Control services the next day.
They advised me that they’d off my dog with his next offense, and quarantine was required (a huge amount of money for us back then).

That’s the way laws often work. In the military it’s probably worse because people are awarded in the promotion process for coming up with new ways to (do whatever…”this person was great and didn’t change a thing!” isn’t really the way to get promoted, typically). SO the regulations build and build and often, eventually no one really knows what they are there for. And if you take a regulation away and disaster follows, you’re in trouble. But there’s no repercussions for keeping them. On the contrary, that’s typically the standard excuse for gross inefficiency, “Hey! I was just following the regs!” And they’re right.
/rant over

That is to say: Say some time-varying quantity X is governed by a large number of factors. Some of them increase X and some of them decrease X. Over a certain period of time, the ones that increase X have more effect on net than the ones that decrease it, and X increases.

Then when people ask “Why did X increase?” And other people list off the long list of factors that caused X to increase at that time. And then you say, “Isn’t it unlikely that all those factors all happened to trend in the direction of increasing X simultaneously?” And the answer is, not really! It only appears that way due to the selection bias of having only listed all the factors that happened to be increasing X at that time, and not listed all the many factors helping to decrease X at that time, which just got balanced out on net. Look at the whole picture and it’s not particularly unlikely; restrict to the side that won out, pretend nothing else exists, and of course it looks unlikely.

If you add up 100 gaussian processes and look at the largest fluctuation, it will be due to 10 processes having coincident fluctuations. And those 10 won’t tell you about any other behavior than that fluctuation. But if you add up 100 gaussian processes, the largest fluctuation won’t attract your attention and you won’t do this. In the opposite extreme, where the constituents have infinite variance, then the largest fluctuation will be due to a single factor.

━━━━━━━━━━━━━━━━━━

That reminds of a story of Levitt. Somewhere I read him concede that the crack epidemic was exogenous; but he insisted that abortion cut crime by an equal amount to the end of the crack epidemic and concluded that if it hadn’t been for abortion the crack epidemic would have been twice as bad.

I meant to say that you are assuming a two period model, but if we have time series data we can ask more questions. My comments apply better to crime than to other examples because crime has fluctuations, while the ones of this post are steady increases. I feel very secure in saying that the increase in crime 1965-1975 was very from the year to year fluctuations. But the examples of steady increase aren’t very different from a two period model. They could be the result of 100 factors, all steadily increasing or decreasing, with no year to year randomness, but each factor supplying a single parameter of degree of increase, slightly biased toward increase.

There is another piece of selection bias, which is the effects we are trying to explain.

There have been many eloquent arguments posted here blaming the massive cost increases in housing, education, and medical care on government intervention and/or on finance capitalism. But how do either of these factors explain the dogs that didn’t bark? One area where we have not seen massive, order-of-magnitude cost increases, despite the presence of both financial capitalism and extensive government regulation, is the automotive market.

In 1968 America, the average new car cost $2,822. According to the CPI, that’s $19,692.29 in today’s money. The cheapest new car in 1968, if I’m not mistaken, was the VW Beetle, which cost $1,699. Adjusted for inflation, that’s $11,855.85 in 2017 dollars.

Today, the cheapest new car in America is the Nissan Versa, which is $12,855 for the base model. That’s only an 8.4% increase. Median car prices have gone up more, to about $33,666 – a nearly 71% increase. Still, that’s nowhere near the 10x boosts we’re talking about in housing, education, and medical care. And the fact remains that you can buy a quite decent new car for the same inflation-adjusted $19,692.29 that the median new car cost in 1968. Furthermore, if the fact that modern cars tend to last much longer than cars from the 1960s-1970s is taken into account, the median new car today may actually be cheaper per mile than its 1968 counterpart.

This is a heavily regulated field. It would be, of course, blatantly illegal to manufacture the original VW Beetle today – it wouldn’t come close to meeting modern emissions, safety, or technology standards. Cars have to scrub the exhaust to a degree unimaginable in 1968; they have to have crumple zones and multiple airbags; they must have antilock brakes, electronic traction control, and even tire pressure monitoring. All this has undoubtedly added to the cost to some degree; we can see this by looking at the Nissan Tsuru, which was basically a 1992 Sentra that Nissan continued to manufacture new for the Mexican domestic market until 2016. These cost as little as $8,700 new in U.S. dollars. By comparing to Nissan’s bottom-of-the-barrel U.S. Versa, we can estimate that American safety/emissions standards probably increase the price of a cheap car by about 47 percent. Again, that’s not nothing, but it isn’t an order of magnitude either.

And finance capitalism has certainly shown its hand in the sale of new cars for quite some time. It’s not unusual for a car company’s finance arm to make more profits than its manufacturing arm. (sorry about the mediocre source – I recall reading much the same thing in Paul Ingrassia’s well-researched books on the U.S. auto industry). Car companies are very innovative about hiding the true cost of their vehicles through subsidized leases and ever-longer finance terms (it used to be that 60 months was about as far as you could extend a car loan, now 72 months is almost standard and 84 months is not unheard of). Nissan and Chrysler specialize in low-income and/or bad credit customers. The German manufacturers often specialize in leases. But none of this has led to the sort of order-of-magnitude increases we see with housing, education, and medical care.

Is it because cars aren’t a necessity? But to most Americans, they are as much a necessity as housing or higher education. In the majority of the country, you can’t get anywhere without a car, and most families have at least one, often two or more. Is it because of competition? Yes, the car industry is competitive, but that raises the question of why housing, education, and medical care aren’t (all of these, except elementary and high school education, are largely run by the private sector). Is it because the existence of used cars restrict the ability of car companies to dramatically hike their prices? But that should also be true for housing (albeit not education or medical care, of course). Is it because cars aren’t positional goods or status symbols? But of course they are.

Anecdote in support of finance being profitable for car companies – we’re considering buying a used car, and since my father-in-law is an old car guy we asked him for negotiating advice. He told us that if we could pay for the whole thing up front it’s save us money because the salespeople would be glad to avoid the hassle of setting up the loan paperwork. Fortunately, we double-checked this advice on the internet before acting upon it, because the internet will tell you that nowadays the dealers expect to make a certain amount of profit on your loan interest and will actually demand a higher price if you’re going to pay the whole amount up front.

Also, notice that the price increases for housing have been concentrated in places where there’s lots of demand and local laws restrict the construction of new supply, and housing prices are significantly affected by the quality of their school districts. I’ve never heard of any municipality restricting the number of cars that are allowed in their territory, and the price of my car reflects only features of the car itself, not anything else like my child’s education or my neighbors.

This is a good point. I mostly agree with the finance capitalism argument for the run up of house and college prices. And I also thought to myself- what other object do we pay for largely through debt but didn’t see as great a run up? Cars. And so you’re right- the answer can’t be ONLY finance capitalism. So we have to combine that with other idiosyncracies of the housing and college markets. When you buy a college, you are buying Access and a brand, with history. You are buying a resume. It is not easy to just create a new, great university out of thin air. So it’s not perfectly competitive, say the way the car market is much more so. Housing is the same- you’re not just buying a house- you are buying a neighborhood, schools, reputation- etc. A car purchase is much more like a phone purchase- you are just buying a commodity like any other, albeit a big one. So even without the easy credit created over the last 40 years college and housing probably would have seen a larger cost increase than in the car market. And with easy credit, this tendency has only been exacerbated.

You did hit on another reason- there is a thriving used market for cars, which does reduce the cost of new cars. There are no “used” colleges, and there are different housing markets where prices didn’t skyrocket like in others. So part of the issue is that colleges and housing averages take into account widely different markets, whereas a car is a car is a car in any market, so the average price is much more reflective of the market. So this does argue against the finance capitalism case as well. I also think, while the average price of a car has remained relatively constant over time, the quality of the average car has greatly improved- gas mileage, computer systems, sound systems, power windows, breaking, etc. So this increase in quality, like for a lot of goods, isn’t captured in the CPI data and doesn’t show as cost disease.

Finally, it may have been the case that land values, for housing and colleges, were highly under-realized until we experienced the explosion in debt since 1970. The private market figured out that the government was underestimating the value of land, not taxing it enough, and so swept in and bid the prices up. Land prices next to big cities and bustling economies mean access to jobs, lifestyles, etc. and so should be expensive. There is no such “access” rights with cars.

So to sum up, you are right- it is not JUST finance capitalism/debt that caused the cost disease because we likely would have seen the same thing for cars. But it was the other market distortions/characters for these goods, combined with the explosion in debt, (and the implicit government subsidies in the student loan and housing markets) that led to the increases we are seeing.

“Relatedly, a pet theory of mine is that “organizational complexity” imposes enormous and not fully appreciated costs, which probably grow quadratically with organization size. ”

This is almost certainly a dramatic part of the story. An institution is like a cell. If a cell doubles in size, it actually requires 4 times the resources to sustain (or thereabouts, I’m not really a math guy).

There are two reasons I think you’ve overstated the cost disease.
1. Our society is spending a lot of effort to take care of its weakest / most disabled members, who are expensive to take care of.
2. There are diminishing returns to investments in life expectancy.

An example of the first:
All buildings now require access ramps for disabled people. This arguable significantly improves the lives for a small number of people who suffer more than most other people, hence may be a good move from a utilitarian perspective. But in the national statistics, it will show up as your cost disease mystery: why do buildings cost more than they used to, when they don’t fit any more people than they used to?

This applies very strongly in schools. Schools disproportionately spend resources on the children who struggle the most, many due to disabilities. I have three kids in elementary school — in two of their classes there is a student with a full-time assistant paid for by the state — one for an autistic child, and one for a girl with an evident severe physical and mental disability. In the past, these kids would not have made it through a lot of school, would have been in some institution with a lower teacher:student ratio, and would probably have been worse off. This example is doubly bad in the national statistics, because these disabled kids probably weren’t taking the standardized tests 30 years ago, but now they’re bringing down the average. From a utilitarian or Rawlsian perspective, the resources spent on these kids could be considered socially valuable, but you won’t see it in the national statistics. All you see is that it takes twice as many staff to teach my kids, but my kids aren’t learning any more. The worst off in society are the most expensive to help; as society gets richer, it’s not crazy to go further and further out on the margin of spending to help the worst off. But if you’re not specifically measuring how those people do, you’re going to misperceive a cost disease.

An example of the second, on costs of increasing life expectancy:
Housing is more expensive because building codes are stricter. For example, they prevent the installation of dangerous staircases. My grandfather grew up in a house where the only way to get to the second floor was via a ladder, which his dad would race up and down with children on his shoulders. Many will put safety codes in the category of “we did dangerous things and we turned out fine” — but that’s a statement ignorant of survivor bias. A lot of kids didn’t turn out fine. In the last 30 years, childhood deaths due to traffic accidents, fire, and other trauma have fallen dramatically. By most welfare calculations, this is a huge gain for society. It’s also not captured in test scores, or most healthcare performance measures — it is reflected in gains in life expectancy. As we get richer, it makes sense to spend more and more of our resources on extending life. But investments to extend life have diminishing returns. It might cost 10x more to shift life expectancy from 89 to 90 than it did to move it from 79 to 80. We might still want to do it.

Some of the other explanations are surely correct as well, but I think if you don’t count the improvements in our assistance for those who are most expensive and most in need of help, and the diminishing return to investments in life expectancy, then you’re overstating the cost disease.

I think any explanation that starts with “well, we have so much money now that we have to spend it on something…” ignores that many people do not have so much money, and in fact are really poor, but they get the same education and health care as the rest of us. If the problem were just “rich people looking for places to throw their money away”, there would be other options for poor people who don’t want to do that, the same way rich people have fancy restaurants where they can throw their money away and poor people have McDonalds.

But these industries are special because only rich people pay for them (up front). Poor people have student loans and occasionally grants, Medicare, and low marginal tax rates (infrastructure spending). At least in health care, the McDonald’s option is illegal because people of decided that anything that’s not good/safe enough for rich people shouldn’t exist (see also: why the minimum cost of a house is still so high). I imagine restaurants would be a lot more expensive if every cook was required to do the equivalent of an MD program.

As a general comment about one specific part of the problem – health insurance – everyone is dancing around reasons that it lets prices rise and makes for wasteful consumption.

But at the root of it, it should be said that insurance doesn’t make anything cheaper. Insurance’s purpose, and result, is not to make the price of anything cheaper. It is to distribute financial risk. It’s not going to make any medical practice cheaper by paying for it.

If I have a 1 in 100 chance of getting cancer X over a 10 year time span, which will cost $100,000 to treat if I get it, then roughly $100 of my insurance payments over 10 years go towards paying for that coverage. Plus an extra $5 to $15 to cover the risk of poor actuary predictions by the company charging me based off those assumptions, and their administrative and overhead costs for running their company, and their profit margin. Everything that’s covered by insurance is going to cost more than 100% of the regular cost to treat, because the mechanisms to spread out the risk require extra resources to predict and administrate, and incentivize someone to do so.

So when health insurance is covering catastrophic things that you really need risk covered for, like cancer treatment, that’s still beneficial overall. You’re paying 115% of your expected cost, rather than having some small chance of paying the full cost.

But if insurance is covering, say, a bi-annual doctors visit, what do we get then? I have a 200% chance of visiting the doctor over 1 year. So over the course of a year, my payments will include 200% of the cost of an annual visit, plus an extra 15% for risk, administration, and profit. And what do I get out of it? I’m not reducing any risk of having to pay money. I’m just paying for the privilege of the insurance company being a useless middle man.

The same argument applies even better to things like demanding insurance companies pay for birth control. It’s ludicrous, but that’s where we’re heading.

The common example is that we buy car insurance to repair catastrophic damage to our car, and to get a payout if it gets wrecked. We don’t buy gas insurance, and if we did we’d be paying more per gallon of gas, and be using more gas to boot.

The mere expansion of insurance can be responsible for a lot of our cost creep. It’s so bad some hospitals are giving 10-20% discounts for you to pay upfront instead of going through insurance. It doesn’t explain the whole thing, given the discrepancies of cost creep with Europe. But as a more general point, we need to consider the expansion of services that are actually just wasteful industries. Full-coverage health insurance being one of them.

A brief explanation of the history here: starting in the late 1800s a few life insurance companies began offering what we now call disability policies, designed more to replace wages for missed work than to pay for medical fees. Eventually a few of them added medical benefits. Blue Cross was founded by hospitals as a prepayment plan, not an insurance company; likewise Blue Shield for doctors’ offices. Over time they converged on the same business model as the insurance companies offering to pay medical fees on their disability policies, to the point where Anthem (the largest Blue Cross/Blue Shield franchisee) and Cigna (formerly called Connecticut General, an insurance company founded in the 1860s) are recognized as competitors and there’s nothing unusual about antitrust authorities objecting to their proposed merger (provided you don’t object to the existence of antitrust law). Along the way the federal government exempted employer-provided health benefits from WW2-era cost controls, and later from income taxes, cementing the role of employers in the system.

Health plans aren’t really insurance, though they have some insurance-like qualities, and it’s an accident of history that we call them “insurance” when they really aren’t.

Huh, that’s interesting. I had been under the impression that health plans were primarily insurance-like prior to the HMO act in the 70s. I guess HMOs are less different than the previous health plans than I thought? Or what?

(And can we infer that the idea that HMOs would keep costs down has been a failure, or would things have been even worse otherwise?)

@BBA:
If a disability policy/company can spend a little bit of money to cure (prevent) your disability, this is actually a cost savings on their part.

So, paying medical claims seems like it is a natural part of a disability policy. Why pay for the lifetime disability of lameness when you can pay for the ACL knee repair?

Do you know when the disability part became divorced from the healthcare part? I’m guessing it dates to the point of the favored tax treatment. I seem to recall that you want to pay for life insurance and with after tax dollars, otherwise any payment on the policy is taxable. I’m wondering if the same applies to disability policies, which would tend to make that coverage become its own separafe thing.

“Health insurance” is a combination of both an insurance plan (for high-cost, low-risk conditions like cancer) and a subscription plan (for routine medical care).

Almost all countries also have a redistributional element, at least from healthy to ill (in the US, the requirement to sell at one price regardless of pre-existing conditions is this), and in most countries from rich to poor.

Take birth control. OB/GYN treatment and birth control generally means that healthy young adult cis women have higher health costs than healthy young adult cis men. Much more so if they get pregnant, but even if they don’t. Requiring “health insurance” to cover this and not be allowed to charge women more than men means that it redistributes from men to women.

We should probably ask whether this redistribution (a) is a legitimate public policy goal and (b) is being done efficiently through the insurance system.

This is the thesis of the book “Phishing for Phools,” by Nobel-winning economists George Akerlof and Robert Shiller. The authors advance the disturbing thesis that sellers will continually look for ways to dupe customers into paying more than they should, and that these efforts will always be partially successful. In Akerlof and Shiller’s reckoning, markets don’t just sometimes fail — they are inherently subject to both deceit and mistakes.

Compare this to:

It’s almost as if industries have their own reasons for switching to more-bells-and-whistles services that people don’t necessarily want, and consumers just go along with it because for some reason they’re not exercising choice the same as they would in other markets.

Manipulation and deceit in the former, a touch of guile in the latter. Then we also have Trump and Brexit to consider, more success stories for giving people a light push in the direction of their less rational desires.

Has the technology of marketing and manipulating just finally gotten too good for the competition?

One possible factor that I don’t think anyone has mentioned. For manufactured products, the west has outsourced manufacturing to countries where the labor is cheaper, environmental regulations less strict, etc. You obviously can’t do this for health care, schooling, and housing. Even the agricultural sector employs a lot of undocumented immigrants who aren’t payed.

Also, these could be areas where money creation is channeled, because one costs are predictably rising, it makes sense to invest money and creat financial bubbles.

I thought I would also make a comment about your multifactorial trends post, which focused on crime.

It seems to me that one MAJOR factor for crime dropping is the ubiquitousness of cell phones. Since the drop occurred in all western countries about the same time, and it corresponds to when cell phones became popular, this seems like a likely explanation.

Previously, to report a crime, someone had to get to a phone. Many obervers of crime weren’t likely to do this, or do it too late. Once cell phones were widely in use, it became much easier. If you saw something you could just dial 9/11. As time went on, cell phones also became cameras. Thus crimes became much, much harder to commit and get away with. It’s kind of surprising to me that no one seems to pick up on that factor when it seems so obvious. And indeed, it seems like the types of crimes that have dropped the most are exactly the ones where cell phones would be a huge deterrant (public muggings and carjackings for instance). On the other hand, the drop in domestic violence wasn’t anyone near as dramatic (something people would be less likely to see/record/call in about)

If these massive increases in cost don’t show up in profits, then where do they show up? There must be some sector(s) of the economy that has dramatically expanded to take in all of this money. If we find sectors that are much larger than in 1970, then we should think about how they money got there. For example,
1. if we want to blame litigiousness, then we should expect to find much more money flowing into law firms (more lawyers, higher salaries). My anecdotal experience agrees, but I’m sure one could find evidence here.
2. From the top of my head, the finance sector has radically expanded in the last 50 years. Can we trace the money trail to figure out if that trend is responsible for the cost explosion?
3. Other ideas?

Is there a place where I (a layman) can read about how exactly one adjusts prices to inflation? I’m willing to take on faith that all these prices are “inflation-adjusted”, but I’d like to understand exactly what it means.

Generally you multiply/divide it by an index that attempts to measure how much a dollar (or other currency*) was worth in two different years, generally by comparing the price of a specified set of goods and/or services. It’s not an exact science, made more obvious in the context of a discussion of how costs in some sectors have outpaced costs in other sectors. There’s no “abstract real value unit” whose price you can measure in US dollars over time (if there were, people would probably try to invest in it and use it as a medium of exchange, which would make it more volatile.)

I can’t speak for the people making the comments being quoted, but if I were going to mention an “inflation-adjusted amount” in a comment and the precise value wasn’t central to my point, I’d tend to just trust the first google result for the phrase “inflation calculator”, which as it turns out is a government site using the US CPI. More information can be found here.

* Where all this loses me though is why these don’t tend to be anywhere near transitive with currency conversions using historical exchange rates.

I haven’t read every single comment here or on the original post, but I’ve read enough to feel like my pet answer about higher-education costs has not been addressed. Specifically, isn’t it possible that the near impossibility of discharging student loan debt in bankruptcy explains why costs have increased so much?

I’m not a legal expert, much less a bankruptcy lawyer, but it is my understanding that the US Bankruptcy Code was enacted in 1978 and made it very difficult to discharge student loan debt. If lenders know borrowers have to repay their debt, then the lender has no incentive to responsibly lend. (Why the borrower would take on the debt is another question, though the answer is probably some combination of prestige and asymmetric information.) If colleges know their students can essentially pay whatever price is set, they will raise that price as much as they want. After all, students change every four years, and it is difficult for students and potential students to evaluate quality, as many people have pointed out. So, colleges raises prices and lenders gladly send it, with students being simply vessels for the transfer of the income. The physical manifestation is nicer building, bigger stadiums, nicer dorms, etcetera. I believe federal loans constitute the majority of student debt and, while they are not dischargeable, they do have features which should make lenders more price sensitive. I also realize my explanation makes different predictions based on length of study, institution type, and type of degree, but I have not explored whether the cost behavior in the link above supports those implications.

This chart is the best data I could find on cost, and it goes back to 1971. Nominal costs have increased 6.67% per year, real at 2.54%, for private non-profit four year universities. Interestingly, the real costs for 1971-1981 were essentially the same, though nominal costs were much higher; I assume the difference is because of the inflation of that decade. That the increase only appears after the new bankruptcy policy is, to my first glance, strong suggestive evidence of my thesis.

The second part is to ask: what do the cost trends look like during the period the French call ‘les trentes glorieuses’ (the end of WWII to the 1973 OPEC crisis)? That is, most of the explanations I have read should also apply during that period, but the data presented in the original post only go to 1970. The education data I know and showed above support the idea that the cost disease is a newish phenomenon. If that temporal dynamic is the case, then explanations need to focus on what changed during the 1970s. Perhaps the expansion of government as part of the War on Poverty – more Medicaid and Medicare, housing support, education support (?) – is then part of the story. But it is probably not the whole story.

Of course, even if this answer is correct, it does not explain cost disease in health care or infrastructure. I am also not making a claim about nasty financiers or greedy administrators.

I think that one should consider that Utah has perhaps the least corrupt state Government in the country and spends about half per capita on healthcare as some other states and education and gets about as good results. (Also consider that Florida, full of old people not to concerned about college, educates a student in state schools Universities for about half the cost of some other states.)

What often seems to happen is that the Federal government subsidizes demand while the state governments restrict supply. Now if all spending on health care (for example) came from the federal government when the providers in a state went to state politicians with requests that they regulate without regard to costs one would I assume that state politicians would regulate with little thought to reducing cost or worrying about cost in the trade off between costs and safety.

If I am right:
1. All healthcare regulation should go to the Federal Gov.
2. All K-12 regulation should be done at the state and local level (eliminate the Dpt of education).
3. The Feds should take over the state universities or stop subsidizing demand for U ed. loans etc.
4. All environmental and safety regulation of subways and the like should be at the state local level.

Okay. So, I’m not going to speak to the main thread, because 1000 comments makes it impossible to do so at this point. But I think something that is missed throughout all this is that a lot of the “cost disease” problems are explicitly American. So the problem has to be something specific to America.

If I had to harbor any sort of guess, it’s that the individualist sentiment that drives this country greatly exasperates costs and makes cost control very difficult. On a cultural level, especially post World War II, there’s been this great effort to idealize the individual on a cultural and social level, to transcend tribal or identitarian boundaries. Because of this, almost everything in our culture and business is built around catering to individuals.

The problem with this is that, as taking even a beginner’s course of economics will tell you, individuals are very expensive. Economies of scale work because they favor large groups with little efforts to differentiate a single product. While we improved the ability to offer some customization, that principle remains the same. The greater the need for personalization or individualization, the more expensive the product gets.

If you look at almost all the items discussed in the article, all of them have had increased levels of individualization in recent decades. In primary education, there’s an increased number of special education students, and those are often the most expensive students to care for because of their individual needs via IEPs or 504 plans. Even if we were to discount the special ed students, many primary and secondary schools (both public and private) now offer students a chance to pick at least some of the courses they take. So you got not just your basic requirements of reading, writing, and arithmetic, you got variations of all that: Different skill levels of essentials, Advanced Placement/IB courses for highly-talented/well-placed students, different science classes, a variety art and music classes, vocational courses for people who feel more comfortable doing more hands-on work, programming, etc. I think the only area where there isn’t variety is Phys Ed/Health.

Collegiate education has had an explosion of majors. Most colleges pre-70s had maybe a dozen majors at most, and that was enough. Now there’s maybe a dozen majors in a single department at a big college, maybe more. With more majors means more courses, more courses means more individualization. And each course requires specific resources that can’t be shared from other courses or majors. This is especially the case with schools that have liberal arts, art, or STEM departments.

Health care has been very individualized to “optimize” patient care and their needs. And often, those optimal solutions often involve the most advanced treatments or diagnostics, since they are the most likely to rule out everything. Now, some health issues require that, but many do not. Often there is precedent to give the most advanced option, even if symptoms don’t necessarily manifest the need for them. But either way, individualized care means making decisions per case rather than by common condition. That increases cost.

Infrastructure, this may not seem to be the case. But individualist sentiment still plays a role in the reverse manner: An individual or small group of individuals can delay, derail, or prevent an infrastructure project from happening. All it takes is one loud and/or photogenic granny whose house she’s lived in for decades is in the way of a highway or new complex for the project to stall. Back in the 40s and 50s, when Robert Moses was essentially King of NYC, he could build highways over poor neighborhoods because the communities and people in those areas lacked collective agency or individualist will. Once he targeted Greenwich Village in the early 60s, the individualist Jane Jacobs stepped in and organized against him, ultimately bringing him down. To mitigate the effects of individualist counter-action, rules and regulations have been added to at the bare minimum protect personal interests, which are only ignored in the event of an emergency, say a natural disaster or something. Those push up costs on top of the inevitable lawsuits that still happen anyway.

The issue at heart is American individualism. The solution to such costly endeavors would be a culture shift away from such sentiments to more tribal/collective elements, but to do so would require undermining the foundation of American culture and social life. And that is something that is impossible to do, short of committing a civil war.

Of course, this is only a guess. I feel like there’s probably something I’m not considering on a technical level. But a lot of these decisions have a cultural root to them at some point on the chain.

It is important to break out college tuition and mortgage price increases from k-12 education and healthcare increases as college and housing are a person’s largest expenses over their lifetime, vs. grade school education and healthcare, which consume a lot less of an individual’s lifetime budget.

Since the 1970’s people have been able to take on more debt. This debt finds its way, in particular, into college tuition and housing costs, as those two items are easily debt financed because of government subsidies, bank policies, the type of good they are, and their size. Things started apace once we came off the gold standard in 1971, and quickly sped up once the Reagan tax cuts, and banking deregulation that occurred in 1980’s kicked in. All of a sudden, people were able to borrow more, much more, and the tax cuts freed up income to go towards debt service to financiers, which found its way into college tuition and housing prices (amongst other assets, like stocks and paintings). Household debt to GDP increased from 40% in 1968 to almost 100% in 2008.

Debt has also grown much faster than the economy- allowing certain sectors to grow faster in price than the economy as a whole. Big items like the cost of housing and college have increased because of this. Notice the jump in debt starting in 1970 in the chart below (couldn’t post- basically, total credit market debt went from being equal to GDP in 1970 to being 3.5x GDP by 2008- over $55 trillion in debt vs. $14 trillion in GDP)- again, the country coming off the gold standard which removed restrictions on the amount of debt the country could run up. When someone finds a house or is accepted to a college, they don’t often say “I would like this product but can only pay a quarter of what it costs out of my own savings/income.” Rather they say, “how much student aid or mortgage debt can I obtain for a college or house that costs X.” The price doesn’t necessarily restrict them, their ability to borrow does. And lenders are motivated to help, as their income depends on it. Therefore, prices for items that are paid for by borrowing are not restricted to income as is something much more discretionary, like an iphone.

With regards to healthcare, I think you know way more about this than I. This is less of a debt story (as healthcare spending for individual budgets is not of the same budget magnitude as housing or college education) as it is a market issue/costly end-of-life-care story. But you mention in your blog that healthcare costs have gone up 8 times since 1960. First, it has gotten better over time, so quality did improve. Also regarding quality, some hospitals I’ve stayed in in America are better than hotels- I’ve also been in hospitals overseas- not quite the same. Second, one of your graphs notes US citizens spent about $10,000 per capita in 2013 on healthcare. But, in my experience, for the last 10 years, depending on which jobs I and my wife have had, and whose insurance we’ve used, we’ve only spent about $6,000 per year each year on health care insurance. So OUR costs haven’t gone up in 10 years, but the TOTAL cost in the system has gone up (being made up through subsidies, taxes, bargaining power, insurance, etc.) dramatically over the same period of time. What other product do you buy and you don’t ask how much it costs when you check out?

K-12 expenses have gone up the least over the past 40 years in your example, *only* 2.5x, and I’m willing to bet the majority of those cost increases are actually on infrastructure improvements/sports fields/building improvements and other real estate expenses that would be tied to the increase in real estate debt we’ve seen in the mortgage example above. And the fact that schools also provide more social services now (aftercare, lunch subsidies, etc.) than in the past, which would lead to an increase in cost.

Since 1970 we haven’t had large increases in income (at least in the middle class) but we’ve had enormous increases in the debt this class could take on. This debt was basically a free lunch (until it wasn’t in 2008) in the sense that certain products- college education, housing- could be financed not out of income, but out of borrowing. PRICES WERE ABLE TO INCREASE BECAUSE NO ONE REALLY KNEW WHO WAS PAYING for these products, until the day of reckoning occurred in the financial collapse of 2008 and the borrowers realized it was they. And the colleges and house sellers were able to take advantage of this situation by increasing prices. The recession didn’t change this, rather the government doubled down on subsidies, support, and price inflation in order to get us out of it.

Yes, regulation, laws, lawsuits, government, falling productivity, unionized/unionized labor, complex/limited markets, zoning, unidentified increases in quality, social costs, etc. all played a part in the cost disease, as so many have commented. But let’s not forget that without the increase in debt, most of the increase would not have been able to have been paid for in the first place.

Why hasn’t the increase been captured by profits or salaries? Oh, but it has- you’re just looking in the wrong place. Find who did the lending, and you’ll find where the profits went and whose salaries increased.

What’s missing in these comments is the historical religious context of our educational and healthcare systems. In the Christian West, care for the sick and education of youth were traditionally under the purview of the Church and family. Thus, our hospitals generally had “Presbyterian” or “Jewish” in their names, or otherwise were named after some Catholic saint. Children went to either explicitly parochial schools, or to public schools which were essentially generic Protestant Christian, a legacy of our nerdy Puritan forebears.

This system was dismantled in America over the last century. In America this dismantling was mostly unintentional, while in Bismarck’s Germany this was an intentional front in the Kulturkampf (“culture war”). Instead, the now post-Christian West relies on the market and the state. In America, the replacement generally takes the form of a hybrid between the two, either as a “nonprofit” or a publicly-funded private corporation. This monstrous hybrid is the result of an unwitting collaboration between conservative liberals and progressive liberals. This basic story has repeated itself throughout all aspects of our secularizing society, but the shift has been most drastic in healthcare and education. To quote Patrick Deneen, “Both the left and the right effectively enact a pincer movement in which local associations and groups are engulfed by an expanding state and by the market, each moving toward singularity in each realm: one state and one market.”

The miserable results we are witnessing in healthcare and education should make us question whether this shift was justified. While the market and the state are sufficient for ensuring animal welfare, they are by their nature insufficient for the education and care of human beings. The education system must necessarily involve itself with instilling moral values in future generations. The instilling of moral values in future citizens and voters, besides being needed to maintain order in the classroom, is a primary justification for public education funding and truancy laws. (Vocational training for future units in the labor force is of course another purpose of our schools, but we rely on schools for much more than this.) This task is essentially a religious one, and so both the amoral market and ostensibly religiously-neutral state are poorly suited to it. Our public schools’ failures in English and mathematics betray deeper failures in moral education, especially among inner city schools where classroom order is precarious at best.

The healthcare system must also necessarily make decisions requiring moral calculus, in order to utilize scarce resources while honoring human dignity. For example, our society is at ease putting down pets with terminal illness, both to minimize their pain and our expenses. In contrast, most of us believe that human life, even if filled with pain and suffering, may be worth prolonging, even at taxpayers’ expense. This belief is fundamentally religious, following our moral intuitions that human life has value and meaningfulness beyond one’s ability to experience pleasure and avoid pain. Because our healthcare system’s basic task is to operationalize this religious belief, its objective cannot be implemented optimally by institutions that are blind to religious terms in any utility function. And because our current healthcare system lacks the language to discuss thorny moral issues, it limits itself to purely financial considerations (the market) or to political considerations (majority vote + lobbyists), both of which are deeply problematic.

The market and the state are not only unable to recognize the religious ends of healthcare and education, but also the religious means by which they ought to be provided. Teaching and healing are both labors of love, because they are directed at human persons who are worthy of love. These jobs are thus utterly unlike teaching computers via machine learning or fixing engines at the car shop. While most individual teachers, school counselors, nurses, and doctors are certainly motivated by love for those under their care, this is not enough. The entities they work for must also be institutionally bound by love. This is however very difficult for our impersonal corporate and state bureaucracies. Corporate bureaucracies are driven by shareholder profit, while state bureaucracies are driven by aversion to change and accountability. The empathic difference between those who deliver education and healthcare and those in charge of administration leads to frustration among the former. Well-administered schools and hospitals must have love-oriented administrators and administrative systems. Love necessarily depends upon a sense of binding. This sense of binding is nothing other than “religion”, derived from the Latin religare, which means “to bind fast.”

Sorry the union enlargement is based on a lie. Most people don’t want to be THE boss, the person that has to take out a loan, found the business and can lose all he’s gained. Those that do, already are. They want at most a middle management position where someone else takes the risks so they can do a fixed amount of work for a guaranteed income and go home. I agree with them, we’ve gotten awfully tough on anyone that succeeds in business.
The reason there is some groveling is the imbalance has gotten so large in Favor of the employee that there are exponentially more employees that want a high paid safe job, and fewer people that want to take the chance on the market. You’ll notice U.S. business starts have dropped precipitously the past 20 years or so, and those who remember the 90’s remember more employee poaching and a lot less groveling.
That’s the problem with “protecting” workers from the successful boss, If you look at the union history, unions almost never disband. The Entire shrinking of the union sector is companies that employed them being driven out of business by the two sided risks of market forces and union both dominating the “Boss”.
Of course, now even more people want to be an employee, and less want to take the risks of being the Boss. Balance the incentives so more people want to start businesses again, and there will be more competition for hires, and less competition to be a hire.

In response to David Manheim about limitless demand, there’s a simple counter argument to that. If administrative bloat / other costs are truly not necessary, companies should just them & reap benefits of the propped up demand with 90% profit margins. That not happening is strong evidence that admins are necessary for achieving some purpose, whether it is regulatory compliance, increasing quality (through reduced risk, increased nines of reliability, or other measures of quality that haven’t been sought in this discussion so far)

I will be a licensed veterinarian in just a few more weeks, so I’d like to shed a little light on that apparent anomaly.

Have costs risen? Yes, absolutely. But as opposed to many measures of education and human medicine, consumers are getting a lot more in terms of pet health care to balance out at least some of that increase in price. Pets live a lot longer than they used to despite an obesity problem that rivals even that of their humans. They have better lives day to day in terms of their own quality of life and the things that make them more amenable to people. When is the last time you saw fleas? They used to be everywhere.

Additionally, veterinary medicine has been able to play catch up to human medicine in terms of diagnostics (MRIs, CTs) and procedures (brain surgery, orthopedic implants, advanced dental care, physical therapy, chemotherapy regimens, dialysis). These options were simply not widely available a generation ago.

The willingness to pay for this advanced care can be attributed more to a cultural change – dogs and cats are family now instead of pets or animals with a job to do.

The key difference for me between veterinary medicine and the examples of cost disease is that controlling for a dramatic increase in the quality and choice of services, the cost has not risen quickly if at all relative to other goods and services. If you want to give your dog the healthcare your grandpa gave his dog (vaccines, deworming, good quality food, maybe a spay/neuter procedure, and a peaceful death when he gets too sick or injured) you can do that pretty darn cheap. If you want to give your dog health care that rivals your own, you can do that too for a higher price.

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